UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO
SECTION
13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
|
For
the fiscal year ended December 31, 2006
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Commission
File No. 1-11083
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BOSTON
SCIENTIFIC CORPORATION
(Exact
Name Of Company As Specified In Its Charter)
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DELAWARE
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04-2695240
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(State
of Incorporation)
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(I.R.S.
Employer Identification No.)
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ONE
BOSTON SCIENTIFIC PLACE, NATICK, MASSACHUSETTS 01760-1537
(Address
Of Principal Executive Offices)
(508)
650-8000
(Company’s
Telephone Number)
Securities
registered pursuant to Section 12(b) of the Act:
|
COMMON
STOCK, $.01 PAR VALUE PER SHARE
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NEW
YORK STOCK EXCHANGE
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|
(Title
Of Class)
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(Name
of Exchange on Which Registered)
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Securities
registered pursuant to Section 12(g) of the Act:
NONE
________________
Indicate
by check mark if the Company is a well-known seasoned issuer, as defined
in Rule
405 of the Securities Act.
Yes:
R No
£
Indicate
by check mark if the Company is not required to file reports pursuant to
Section
13 or Section 15(d) of the Act.
Yes:
£ No
R
Indicate
by check mark whether the Company (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 Company was required
to
file such reports), and (2) has been subject to such filing requirements
for the
past 90 days.
Yes:
R No
£
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of the Company’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K. £
Indicate
by check mark whether the registrant is an accelerated filer (as defined
in Rule
12b-2 of the Act).
Yes:
R No
£
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule
12b-2 of the Exchange Act).
Yes:
£ No
R
The
aggregate market value of the Company’s common stock held by non-affiliates of
the Company was approximately $21.8 billion based on the closing price
of the
Company’s common stock on June 30, 2006, the last business day of the Company’s
most recently completed second fiscal quarter.
The
number of shares outstanding of the Company’s common stock as of January 31,
2007, was 1,480,340,219.
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3
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3
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24
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34
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34
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34
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34
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34
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34
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35
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36
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65
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66
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132
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132
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132
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132
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132
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141
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141
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141
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141
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141
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141
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151
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EX-10.2
FORM
OF OMNIBUS AMENDMENT
|
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EX-10.16
FORM
OF DEFERRED STOCK UNIT AWARD AGREEMENT
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EX-10.21
FIFTH
AMENDMENT TO 401(K) RETIREMENT SAVINGS PLAN
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EX-10.23
2006
GLOBAL EMPLOYEE STOCK OWNERSHIP PLAN
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EX-10.24
FIRST
AMENDMENT TO 2006 GLOBAL EMPLOYEE STOCK OWNERSHIP PLAN
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EX-10.46
GUIDANT
CORPORATION 1994 STOCK PLAN, AS AMENDED
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EX-10.47
GUIDANT
CORPORATION 1996 NONEMPLOYEE DIRECTOR STOCK PLAN, AS
AMENDED
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EX-10.48
GUIDANT
CORPORATION 1998 STOCK PLAN, AS AMENDED
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EX-10.49
FORM
OF GUIDANT CORPORATION OPTION GRANT
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EX-10.50
FORM
OF GUIDANT CORPORATION RESTRICTED STOCK GRANT
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EX-10.51
GUIDANT
CORPORATION EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN
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EX-10.52
FIRST
AMENDMENT TO GUIDANT CORPORATION EMPLOYEE SAVINGS AND STOCK
OWNERSHIP
PLAN
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EX-10.53
SECOND
AMENDMENT TO GUIDANT CORPORATION EMPLOYEE SAVINGS AND STOCK
OWNERSHIP
PLAN
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EX-10.54
THIRD
AMENDMENT TO GUIDANT CORPORATION EMPLOYEE SAVINGS AND STOCK
OWNERSHIP
PLAN
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EX-10.55
FOURTH
AMENDMENT TO GUIDANT CORPORATION EMPLOYEE SAVINGS AND STOCK
OWNERSHIP
PLAN
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EX-10.56
FIFTH
AMENDMENT TO GUIDANT CORPORATION EMPLOYEE SAVINGS AND STOCK
OWNERSHIP
PLAN
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EX-12
STATEMENT REGARDING COMPUTATION OF RATIOS OF EARNINGS TO FIXED
CHARGES
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EX-21
LIST OF SUBSIDIARIES AS OF 2/28/2007
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EX-23
CONSENT OF ERNST & YOUNG, LLP
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EX-31.1
SECTION 302 CEO CERTIFICATION
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EX-31.2
SECTION 302 CFO CERTIFICATION
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EX-32.1
SECTION 906 CEO CERTIFICATION
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EX-32.2
SECTION 906 CFO CERTIFICATION
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The
Company
Boston
Scientific Corporation is a worldwide developer, manufacturer and marketer
of
medical devices that are used in a broad range of interventional medical
specialties including interventional cardiology, cardiac rhythm management,
peripheral interventions, cardiac surgery, vascular surgery, electrophysiology,
neurovascular intervention, oncology, endoscopy, urology, gynecology and
neuromodulation. When used in this report, the terms “we,”
“us,”
“our”
and
the “Company” mean Boston Scientific Corporation and its divisions and
subsidiaries.
Since
we
were formed in 1979, we have advanced the practice of less-invasive medicine
by
helping physicians and other medical professionals treat a variety of diseases
and improve patients’ quality
of life
by providing alternatives to surgery and other medical procedures that
are
typically traumatic to the body. Some of our medical products are used
for
enlarging narrowed blood vessels to prevent heart attack and stroke; clearing
passages blocked by plaque to restore blood flow; detecting and managing
fast,
slow or irregular heart rhythms; mapping electrical problems in the heart;
opening obstructions and bringing relief to patients suffering from various
forms of cancer; performing biopsies and intravascular ultrasounds; placing
filters to prevent blood clots from reaching the lungs, heart or brain;
treating
urological, gynecological, renal, pulmonary, neurovascular and gastrointestinal
diseases; and modulating nerve activity to treat deafness and chronic pain.
Our
history began in the late 1960s when our co-founder, John Abele, acquired
an
equity interest in Medi-tech, Inc., a research and development company
focused on developing alternatives to surgery. Medi-tech’s initial products, a
family of steerable catheters, were introduced in 1969 and were used in
some of the first less-invasive procedures performed. In 1979, John Abele
joined
with Pete Nicholas to form Boston Scientific Corporation, which indirectly
acquired Medi-tech. This acquisition began a period of active and focused
marketing, new product development and organizational growth. Since then,
our
net sales have increased substantially, growing from $1.8 million in 1979
to approximately $7.8 billion in 2006.
Our
growth has been fueled in part by strategic acquisitions and alliances
designed
to improve our ability to take advantage of growth opportunities in the
medical
device industry. In 2006, we experienced a transforming event with our
acquisition of Guidant Corporation, a
world
leader in the treatment of cardiac disease. This acquisition enabled us
to
become a major provider in the more than $9 billion global Cardiac Rhythm
Management (CRM) business, enhancing our overall competitive position
and long-term growth potential and further diversifying our product portfolio.
With this acquisition, we have become one of the world’s largest cardiovascular
device companies and a global leader in microelectronic therapies. This
and
other acquisitions have helped us add promising new technologies to our
pipeline
and to offer one of the broadest product portfolios in the world for use
in
less-invasive procedures. We believe that the depth and breadth of our
product
portfolio has also enabled us to compete more effectively in, and better
absorb
the pressures of, the current healthcare environment of cost containment,
managed care, large buying groups and hospital consolidation.
The
Drug-Eluting Stent Opportunity
Our
broad, innovative product offerings have enabled us to become a leader
in the
interventional cardiology market. This leadership is in large part due
to our
coronary stent product offerings. Coronary stents are tiny, mesh tubes
used in
the treatment of coronary artery disease and implanted in patients to prop
open
arteries and facilitate blood flow from the heart. We have further enhanced
the
outcomes associated with the use of coronary stents, particularly the processes
that lead to restenosis (the growth of neointimal tissue within an artery
after
angioplasty and stenting), through dedicated internal and external product
development and scientific research of drug-eluting stent systems.
Use
of
our products in the United States and abroad has demonstrated that drug-eluting
stents reduce the need for repeat procedures—or more expensive surgical
procedures—and reduce healthcare costs, as well as overall patient risk, trauma,
procedure time and the need for aftercare. Since its U.S. launch in
March 2004 and its launch in our Europe and
Inter-Continental markets in 2003, our proprietary polymer-based
paclitaxel-eluting stent technology for reducing coronary restenosis, the
TAXUS®
Express2™
paclitaxel-eluting coronary stent system, has become the worldwide leader
in the
drug-eluting coronary stent market. In 2006, approximately 30 percent of
our net sales were derived from sales of our TAXUS stent system.
We
are
continuing to enhance our product offerings in the coronary drug-eluting
stent
market. We recently launched our next-generation coronary stent, the TAXUS®
Liberté™ paclitaxel-eluting coronary stent system, in our Europe and
Inter-Continental markets, and we expect to launch the product in the U.S.,
subject to regulatory approval. The Liberté™ coronary stent is designed to
further enhance deliverability and conformability, particularly in challenging
lesions. Also, prior to our acquisition of Guidant, Abbott Laboratories
acquired
Guidant’s vascular intervention and endovascular solutions businesses and shares
the drug-eluting technology it acquired from Guidant with us. This arrangement
gives us access to a second drug-eluting stent program which complements
our
existing TAXUS coronary stent program. In the fourth quarter of 2006, we
launched our PROMUS™ everolimus-eluting stent system in certain European
countries and expect to launch the PROMUS stent system in certain other
European
markets in the first quarter of 2007, certain Inter-Continental markets
in the
second quarter of 2007 and in the U.S. in 2008, subject to regulatory approval.
Our
U.S.
TAXUS stent system sales decreased in 2006 relative to 2005, due in part
to a
decline in the U.S. market size due to recent uncertainty regarding the
risk of
late stent thrombosis following the use of drug-eluting stents. Late stent
thrombosis is the formation of a clot, or thrombus, within the stented
area one
year or more after implantation of the stent. In the fourth quarter of
2006, the
FDA held a special advisory panel meeting to discuss drug-eluting stents.
Members of the panel concluded that drug-eluting stents remain safe and
effective when used as indicated, and that the benefits outweigh the
risks.
The
Cardiac Rhythm Management Opportunity
As
a
result of our acquisition of Guidant in April 2006, we now develop, manufacture
and market products that focus on the treatment of cardiac arrhythmias
and heart
failure. Natural electrical impulses stimulate the heart’s chambers to pump
blood. In healthy individuals, the electrical current causes the heart
to beat
at an appropriate rate and in synchrony. We make a variety of implantable
devices that can monitor the heart and deliver electricity to treat cardiac
abnormalities, including:
| · |
Implantable
defibrillator systems used to detect and treat abnormally fast
heart
rhythms (tachycardia) that could result in sudden cardiac death,
including
implantable cardiac resynchronization therapy defibrillator systems
used
to treat heart failure; and
|
| · |
Implantable
pacemaker systems used to manage slow or irregular heart rhythms
(bradycardia), including implantable cardiac resynchronization
therapy
pacemaker systems used to treat heart
failure.
|
Tachycardia
(abnormally fast or chaotic heart rhythms) can prevent the heart from pumping
blood efficiently and can lead to sudden cardiac death. Implantable cardioverter
defibrillator systems (defibrillators, leads, programmers, our LATITUDE® Patient
Management System and accessories) monitor the heart and can deliver electrical
energy, restoring a normal rhythm. Our defibrillators can deliver tiered
therapy—a staged progression from lower intensity pacing pulses designed to
correct the abnormal rhythm to more aggressive shocks to restore a
heartbeat.
Heart
failure (the heart’s inability to pump effectively) is a debilitating,
progressive condition, with symptoms including shortness of breath and
extreme
fatigue. After a person is diagnosed with heart failure, the one-year mortality
rate is high, with one in five people dying. Moreover, once diagnosed,
sudden
cardiac death occurs at six to nine times the rate of the general population.
The condition is pervasive, with approximately five million people in the
U.S.
affected.
Bradycardia
(slow or irregular heart rhythms) often results in a heart rate
insufficient to provide adequate blood flow throughout the body, creating
symptoms such as fatigue, dizziness and fainting. Cardiac pacemaker systems
(pulse generators, leads, programmers and accessories) deliver electrical
energy
to stimulate the heart to beat more frequently and regularly. Pacemakers
range
from conventional single-chamber devices to more sophisticated adaptive-rate,
dual-chamber devices.
Our
remote monitoring system, the LATITUDE® Patient Management System, can be placed
in a patient’s home (at their bedside) and reads implantable device information
at times specified by the patient’s physician. The communicator can then
transmit the data to a secure Internet server where the physician (or other
third party) can access this medical information anytime, anywhere. In
addition
to automatic device data uploads, the communicator enables a daily
confirmation of the patient’s device status, providing assurance the device is
operating properly. Available as an optional component to the system is
the
LATITUDE Weight Scale and Blood Pressure Monitor. Weight and blood pressure
data
is captured by the communicator and sent to the secure server for review
by the
patient’s physician (or other technician). In addition, this weight and blood
information is immediately available to patients in their home to assist
their
compliance with the day-to-day and home-based heart failure instructions
prescribed by their physician.
Business
Strategy
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 believe that the pursuit of this mission
will
likewise enhance shareholder value.
We
intend
to accomplish our 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 obtained externally through strategic acquisitions
and alliances. Building relationships with development-stage companies
and
inventors allows us to deepen our current franchises as well as expand
into
complementary businesses.
Key
elements of our overall business strategy include the following:
Product
Quality
Our
commitment to quality and the success of our quality objectives are designed
to
build customer trust and loyalty. This commitment to provide quality products
to
our customers runs throughout our organization and is one of our most critical
business objectives. During 2005, in order to strengthen our quality controls,
we established Project Horizon, a cross-functional initiative to further
improve
and harmonize our overall quality processes and systems. Under
Project Horizon, we have made an overarching effort to elevate quality
thinking in all that we do. To that end, in 2006, we have made significant
improvements to our quality systems, including in the areas of field action
decision-making, corrective and preventative actions, management controls,
process validations and complaint management systems. In 2006, our Board of
Directors created a Compliance and Quality Committee to monitor our compliance
and quality initiatives. Our quality policy, applicable to all employees,
is “I
improve the quality of patient care and all things Boston
Scientific.”
Innovation
We
are
committed to harnessing technological innovation through a mixture of tactical
and strategic initiatives that are designed to offer sustainable growth
in the
near and long term. Combining internally developed products and technologies
with those obtained through acquisitions and alliances allows us to focus
on and
deliver products currently in our own research and development pipeline
as well
as to strengthen our technology portfolio by accessing third-party technologies.
Clinical
Excellence
Our
commitment to innovation is further demonstrated by our clinical capabilities.
Our clinical groups focus on driving innovative therapies that can transform
the
practice of medicine. Our clinical teams are organized by therapeutic specialty
to better support our research
and development pipeline and marketing and sales efforts. During
2006, our clinical organizations planned, initiated and conducted an expanding
series of focused clinical trials that support regulatory and reimbursement
requirements and demonstrate the safe and effective clinical performance
of
critical products and technologies. In October, we announced positive results
from our TAXUS OLYMPIA registry, supporting the safety and efficacy of
our TAXUS
Liberté stent system in real-world patient subsets considered high risk for
bare-metal stenting, including diabetics, small vessels and long lesions.
We are
currently enrolling patients in our SYNTAX clinical trial, which will
compare the performance of drug-eluting stents with cardiac surgery in the
most complex subsets: those with coronary artery disease in all three
coronary arteries, in the left main coronary artery, or both.
Product
Diversity
We
offer
products in numerous product categories, which are used by physicians throughout
the world in a broad range of diagnostic and therapeutic procedures. The
breadth
and diversity of our product lines permit medical specialists and purchasing
organizations to satisfy many of their less-invasive medical device requirements
from a single source.
Operational
Excellence
We
are
focused on continuously improving our supply chain effectiveness, strengthening
our manufacturing processes and optimizing our plant network in order to
increase operational efficiencies within our organization. By shifting
global
manufacturing along product lines, we are able to leverage our existing
resources and concentrate on new product development, including the enhancement
of existing products and their commercial launch. We are committing additional
resources to support our growth and implementing new systems designed to
provide
improved quality and reliability, service, greater efficiency and lower
supply
chain costs. We have substantially increased our focus on process controls
and
validations, supplier controls, distribution controls and providing our
operations teams with the training and tools necessary to drive continuous
improvement in product quality. In 2007, we are also focused on examining
our
operations and general business activities to identify cost-improvement
opportunities in order to enhance our operational effectiveness.
Focused
Marketing
We
consistently strive to understand and exceed the expectations of our customers.
Each of our business groups maintains dedicated sales forces and marketing
teams
focusing on physicians who specialize in the diagnosis and treatment of
different medical conditions. We believe that this focused disease state
management enables us to develop highly knowledgeable and dedicated sales
representatives and to foster close professional relationships with physicians.
In recent years, we have expanded our direct sales presence worldwide so
as to
be in a position to take advantage of expanding market opportunities.
Active
Participation in the Medical Community
We
believe that we have excellent working relationships with physicians and
others
in the medical industry, which enable us to gain a detailed understanding
of new
therapeutic and diagnostic alternatives and to respond quickly to the changing
needs of physicians and patients. Active participation in the medical community
contributes to physician understanding and adoption of less-invasive techniques
and the expansion of these techniques into new therapeutic and diagnostic
areas.
Corporate
Culture
We
believe that success and leadership evolve from a motivating corporate
culture
that rewards achievement, respects and values individual employees and
customers, and focuses on quality, patient care, integrity, technology
and
service. This high performance culture has embraced an intense increase
in
quality focus, and now places quality at the top of its priorities. We
believe
that our success is attributable in large part to the high caliber of our
employees and our commitment to respecting the values on which our success
has
been based.
Research
and Development
Our
investment in research and development is critical to drive our future
growth.
We have directed our development efforts toward regulatory compliance and
innovative technologies designed to expand current markets or enter new
markets.
Enhancements to existing products that are typically originated and developed
within our research and development, manufacturing and marketing operations
contribute to each year’s
sales growth. We believe that streamlining,
prioritizing
and coordinating our technology pipeline and new product development activities
are essential to our ability to stimulate growth and maintain leadership
positions in our markets. Our approach to new product design and development
is
through focused, cross-functional teams. We believe that our formal process
for
technology and product development aids in our ability to offer innovative
and
manufacturable products in a consistent and timely manner. Involvement
of the
research and development, clinical, quality, regulatory, manufacturing
and
marketing teams early in the process is the cornerstone of our product
development cycle. This collaboration allows these teams to concentrate
resources on the most viable and game-changing new products and technologies
and
get them to market in a timely manner. In addition to internal development,
we
work with hundreds of leading research institutions, universities and clinicians
around the world to develop, evaluate and clinically test our products.
We
believe our future success will depend upon the strength of these development
efforts. In 2006, we expended over $1.0 billion on research and development,
representing approximately 13 percent of our 2006 net sales. Our investment
in research and development reflects:
| · |
spending
on new product development programs;
|
| · |
regulatory
compliance and clinical research, particularly relating to our
next-generation stent and CRM platforms and other development
programs
acquired in connection with our business combinations;
and
|
| · |
sustaining
engineering efforts which factor customer (or “post market”) feedback into
continuous improvement efforts for currently marketed products.
|
Strategic
Initiatives
Since
1995, we have undertaken a strategic acquisition program to assemble the
lines
of business necessary to achieve the critical mass that allows us to continue
to
be a leader in the medical device industry. In 2006, in addition to our
acquisition of Guidant, we invested approximately $500 million
in approximately 25 new and existing strategic alliances and acquisitions.
These
initiatives are intended to further expand our product offerings by adding
new
or complementary technologies to our already diverse technology portfolio.
Many
of
our alliances involve complex arrangements with third parties and include,
in
many instances, the option to purchase these companies at pre-established
future
dates, generally upon the attainment of performance, regulatory and/or
revenue
milestones. These arrangements allow us to evaluate new technologies prior
to
acquiring them.
We
expect
that we will continue to focus selectively on strategic acquisitions and
alliances in order to provide new products and technology platforms to
our
customers, including making additional investments in several of our existing
strategic relationships.
Products
Our
products are principally offered for sale by three dedicated business
groups—Cardiovascular (which includes our interventional cardiology, cardiac
rhythm management and cardiovascular divisions), Endosurgery (which includes
our
oncology, endoscopy and urology/gynecology divisions) and Neuromodulation
(which
includes our cochlear and pain management divisions). Our Cardiovascular
organization focuses on products and technologies for use in interventional
cardiology, cardiac rhythm management, peripheral interventions, cardiac
surgery, vascular surgery, electrophysiology and neurovascular procedures.
Our
Endosurgery organization focuses
on
products and technologies for use in oncology, endoscopy, urology and gynecology
procedures. Our Neuromodulation organization currently focuses on the treatment
of auditory disorders and chronic pain. During 2006, approximately
80 percent of our net sales were derived from our Cardiovascular business
groups, approximately 17 percent from our Endosurgery business groups and
approximately 3 percent from our Neuromodulation business group.
The
following section describes some of our Cardiovascular, Endosurgery and
Neuromodulation offerings:
Cardiovascular
Coronary
Stent Business
Drug-Eluting
Stents
We
market
our TAXUS Express2
paclitaxel-eluting coronary stent system principally in the U.S., and we
expect
to launch the TAXUS Express2
stent
system in Japan during the second half of 2007, subject to regulatory approval.
In January 2007, the FDA approved extending the shelf life of our TAXUS
coronary
stent system in the U.S. from 12 to 18 months. We also market our
second-generation coronary stent, the TAXUS® Liberté™ coronary stent
system, in our European and Inter-Continental markets. We also expect to
launch
the TAXUS Liberté coronary stent system in the U.S., subject to regulatory
approval.
During
the fourth quarter of 2006, we launched our PROMUS™
everolimus-eluting coronary stent system in certain European countries,
expanding our drug-eluting stent portfolio to include two distinct drug
platforms. We expect to launch the PROMUS stent system in certain
Inter-Continental countries during the second quarter of 2007 and in the
U.S. in
2008, subject to regulatory approval. We also expect to launch an internally
manufactured next-generation everolimus-based stent system in Europe in
2010 and
in the U.S. in 2011. In addition, we have commenced regulatory filings
to begin
clinical trials for our next-generation paclitaxel-eluting stent beyond
TAXUS Liberté stent system, the TAXUS® Element™ coronary stent system, which we
expect to launch in Europe in 2009 and in the U.S. in 2010, subject to
regulatory approval.
Bare-Metal
Stents
We
offer
our Liberté coronary stent system globally. The Liberté coronary stent system
serves as the platform for our second-generation paclitaxel-eluting stent
system, the TAXUS Liberté coronary stent system. The Liberté bare-metal coronary
stent is designed to enhance deliverability and conformability, particularly
in
challenging lesions.
Cardiac
Surgery
Our
acquisition of Guidant also enabled us to enter the cardiac surgery business.
Cardiac surgery devices are used to perform endoscopic vessel harvesting,
cardiac surgical ablation and less-invasive coronary artery by-pass surgery.
Coronary
Revascularization
We
market
a broad line of products used to treat patients with atherosclerosis.
Atherosclerosis, a principal cause of coronary artery obstructive disease,
is
characterized by a thickening of the walls of the coronary arteries and
a
narrowing of arterial lumens (openings) caused by the progressive development
of
deposits of plaque. The majority of our products in this market are used
in
percutaneous transluminal coronary angioplasty (PTCA) and include bare-metal
and
drug-
eluting
stents, such as the TAXUS® paclitaxel-eluting coronary stent systems, PTCA
balloon catheters, such as the Maverick® balloon catheter, the Cutting Balloon®
microsurgical dilatation device, rotational atherectomy systems, guide
wires,
guide catheters and diagnostic catheters. We also market a broad line of
fluid
delivery sets, pressure monitoring systems, custom kits and accessories
that
enable the injection of contrast and saline or otherwise facilitate
cardiovascular procedures.
Intraluminal
Ultrasound Imaging
We
market
a family of intraluminal catheter-directed ultrasound imaging catheters
and
systems for use in coronary arteries and heart chambers as well as certain
peripheral systems. In July 2006, we launched the new iLab™ Ultrasound
Imaging System in the U.S. This new system enhances the diagnosis and treatment
of blocked vessels and heart disorders.
Embolic
Protection
Our
FilterWire EZ™ Embolic Protection System is a low profile filter designed to
capture embolic material that may become dislodged during a procedure,
which
could otherwise travel into the
microvasculature where it could cause a heart attack or stroke. It is
commercially available in the U.S., Europe and other international markets
for
multiple indications, including the treatment of disease in peripheral,
coronary
and carotid vessels. It is also available in the U.S. for the treatment
of
saphenous vein grafts (SVGs) and carotid artery stenting procedures.
Peripheral
Interventions
We
also
sell various products designed to treat patients with peripheral disease
(disease which appears in blood vessels other than in the heart and in
biliary strictures), including a broad line of medical devices used in
percutaneous transluminal angioplasty and peripheral vascular stenting.
Our
peripheral product line includes vascular access products, balloon catheters,
stents and peripheral vascular catheters, wires and accessories. We also
market
the PolarCath™ peripheral
dilatation system used in CryoPlasty® Therapy®, an
innovative approach to the treatment of peripheral artery disease in the
lower
extremities. We launched in June 2006 the Sterling™ Balloon dilatation catheter,
a dilatation catheter with several differentiating features, including
the only
pre- and post-stent dilatation indication for carotid artery stenting.
In
January 2007, we completed the acquisition of EndoTex Interventional Systems,
Inc., a development stage medical device company, and now market the NexStent®
Carotid Stent System, a laser-cut, nitinol stent with a rolled sheet design
that
enables one stent size to adapt to multiple diameters in tapered or non-tapered
vessel configurations.
Neurovascular
Intervention
We
market
a line of coils (coated and uncoated), micro-delivery stents, micro-guidewires,
micro-catheters, guiding catheters and embolics to neuroradiologists and
neurosurgeons to treat diseases of the neurovascular system. We market
the GDC®
Coils (Guglielmi Detachable Coil) and Matrix® systems to treat brain aneurysms.
We also offer the Wingspan™ Stent System with Gateway™ PTA Balloon Catheter
under a Humanitarian Device Exemption (HDE) approval granted by the FDA.
The
Wingspan Stent System is designed to treat atherosclerotic lesions or
accumulated plaque in brain arteries. Designed for the brain’s fragile vessels,
the Wingspan Stent System is a self-expanding,
nitinol
stent sheathed in a delivery system that enables it to
reach
and
open narrowed arteries in the brain. The Wingspan Stent System is currently
the
only device available in the U.S. for the treatment of intracranial
atherosclerotic disease (ICAD) and is indicated for improving cerebral
artery
lumen diameter in patients with ICAD who are unresponsive to medical therapy.
Vascular
Surgery
We
design
abdominal, thoracic and peripheral vascular grafts for the treatment of
aortic
aneurysms and dissections, peripheral vascular occlusive diseases and dialysis
access. Our grafts and fabrics are used for peripheral vascular and
cardiovascular indications.
Electrophysiology
We
offer
medical devices for the diagnosis and treatment of cardiac conditions called
arrhythmias (abnormal heartbeats). Included in our product offerings are
RF
generators, mapping systems, intracardiac ultrasound and steerable ablation
catheters, as well as a line of diagnostic catheters and associated accessories.
We also market the Chilli II™ cooled ablation catheter, the first bidirectional
cooled-tip catheter available in the U.S. In 2006, we launched our
next-generation line of RF generators, the MAESTRO 3000® Cardiac
Ablation
System.
Cardiac
Rhythm Management
Through
our acquisition of Guidant, we now offer a variety of implantable devices
that
can monitor the heart and deliver electricity to treat cardiac rhythm
abnormalities, including tachycardia (abnormally fast or chaotic heart
rhythms),
heart failure and bradycardia (slow or irregular heart rhythms).
Our
product offerings include:
| · |
the
VITALITY® family of defibrillators which provide a broad range of atrial
(upper chambers of the heart) and ventricular (lower chambers)
therapies
to serve patients’ various needs;
|
| · |
cardiac
resynchronization therapy devices, like those in our CONTAK RENEWAL®
family of devices, which can help reduce mortality and
hospitalization;
|
| · |
the
INSIGNIA® family of pacemakers which offer proprietary blended sensor
technology designed to measure patient workload through respiration
and
motion, providing rate response based on the patient’s activity; and
|
| · |
the
LATITUDE® Patient Management System, comprised of the LATITUDE
Communicator, LATITUDE Website, CONTAK RENEWAL 3RF CRT-D and
ZOOM®
LATITUDE Programmer, which enables a physician or technician
to monitor a
patient’s device status and health data from home.
|
In
October 2006, the FDA approved our LATITUDE® Patient Management System to be
used for remote monitoring in certain existing ICD systems and cardiac
resynchronization defibrillators. We are in the process of making this
technology available to many of our current CRM patients.
The
Frontier™ CRM
technology is our next-generation CRM pulse generator platform that will
incorporate new components and software and will be leveraged across all
CRM
product lines to
treat
electrical dysfunction in the heart. We expect to launch various products
based
on the Frontier™ CRM
technology in the U.S. over the next 36 months, subject to regulatory
approval.
Endosurgery
Esophageal,
Gastric and Duodenal (Small Intestine) Intervention
We
market
a broad range of products to diagnose, treat and palliate a variety of
gastrointestinal diseases and conditions, including those affecting the
esophagus, stomach and colon. Common disease states include esophagitis,
portal
hypertension, peptic ulcers and esophageal cancer. Our products in this
area
include disposable single and multiple biopsy forceps, balloon dilatation
catheters, hemostasis catheters and enteral feeding devices. We also market
a
family of esophageal stents designed to offer improved dilatation force
and
greater resistance to tumor in-growth. We launched the Radial Jaw® 4 Single-Use
Biopsy Forceps, the newest version of our Radial Jaw Single-Use Biopsy
Forceps,
in July 2006. The Radial Jaw 4 biopsy forceps are designed to enable collection
of large high-quality tissue specimens without the need to use large channel
therapeutic endoscopes.
Colorectal
Intervention
We
market
a line of hemostatic catheters, polypectomy snares, biopsy forceps, enteral
stents and dilatation catheters for the diagnosis and treatment of polyps,
inflammatory bowel disease, diverticulitis and colon cancer.
Pancreatico-Biliary
Intervention
We
sell a
variety of products to diagnose, treat and palliate benign and malignant
strictures of the pancreatico-biliary system (the gall bladder, common
bile
duct, hepatic duct, pancreatic duct and the pancreas) and to remove stones
found
in the common bile duct. Our products include diagnostic catheters used
with
contrast media, balloon dilatation catheters and sphincterotomes. We also
market
self-expanding metal and temporary biliary stents for palliation and drainage
of
the common bile duct. In
2006,
we introduced the Spyglass™ Direct Visualization System for direct imaging
of the bile duct system. This is the first single operator
cholangioscopy device that offers clinicians a direct visualization of the
bile duct system and includes supporting devices for tissue acquisition,
stone
retrieval and lithotripsy.
Pulmonary
Intervention
We
market
devices to diagnose, treat and palliate diseases of the pulmonary system.
The
major devices include pulmonary biopsy forceps, transbronchial aspiration
needles, cytology brushes and tracheobronchial stents used to dilate strictures
or for tumor management.
Urinary
Tract Intervention and Bladder Disease
We
sell a
variety of products designed primarily to treat patients with urinary stone
disease, including ureteral dilatation balloons used to dilate strictures
or
openings for scope access; stone baskets used to manipulate or remove the
stone;
intracorporeal shock wave lithotripsy devices and holmium laser systems
used to
disintegrate stones; ureteral stents implanted temporarily in the urinary
tract
to provide short-term or long-term drainage; and a wide variety of guidewires
used to gain access to a specific site. We have also developed other devices
to
diagnose and treat bladder cancer and bladder obstruction.
Prostate
Intervention
For
the
treatment of Benign Prostatic Hyperplasia (BPH), we currently market
electro-surgical resection devices designed to resect large diseased tissue
sites. We also market disposable needle biopsy devices, designed to take
core
prostate biopsy samples. In addition, we distribute and market the Prolieve
thermodilatation system, a transurethral microwave thermotherapy system,
and the
DuoTome™ SideLite™ holmium laser treatment system for treatment of symptoms
associated with BPH.
Pelvic
Floor Reconstruction and Urinary Incontinence
We
market
a line of less-invasive devices to treat female pelvic floor
conditions in the area of stress urinary incontinence and pelvic organ
prolapse. These devices include a full line of mid-urethral sling
products, sling materials, graft materials, suturing devices and
injectables. In May 2006, we were granted exclusive U.S. distribution rights
to
the Coaptite® Injectable Implant, a next-generation bulking agent, for the
treatment of stress urinary incontinence.
Gynecology
We
also
market other products in the area of women’s health. Our Hydro
ThermAblator® System (HTA® system) offers a less-invasive technology for the
treatment of excessive uterine bleeding by ablating the lining of the uterus,
the tissue responsible for menstrual bleeding.
Oncology
We
market
a broad line of products designed to treat, diagnose and palliate various
forms
of benign and malignant tumors. Our current suite of products includes
microcatheters, embolic agents and coils designed to restrict blood supply
to
targeted sites. In addition, we market radiofrequency-based therapeutic
devices
for the ablation of various forms of soft tissue lesions (tumors). Also
included
in the oncology portfolio is a complete line of venous access products
which are
marketed for infusion therapy.
Neuromodulation
Cochlear
Implants
We
develop and market in the U.S., Europe and Japan the HiResolution® 90K Cochlear
Implant System to restore hearing to the profoundly deaf. The technology
consists of an external sound processor, which captures and processes sound
information from the environment and transmits the digital information
through
the skin to the implant. The implant delivers digital pulses of electrical
current to precise locations on the auditory nerve, which the brain perceives
as
sound. In September 2006, our next-generation cochlear implant technology,
the
Harmony™
HiResolution Bionic Ear System was approved by the FDA. We commercially
launched
this product on a limited basis in late 2006 and anticipate a full launch
in early 2007.
Pain
Management
We
market
the Precision® Spinal Cord Stimulation System for the treatment of chronic pain
of the lower back and legs. This system delivers advanced pain management
by
applying a small electrical signal to mask pain signals traveling from
the
spinal cord to the brain. The Precision System utilizes a rechargeable
battery
and features a patient-directed fitting system for fast and effective
programming. The Precision System is also being assessed for use in
treating migraine pain.
Dedicated
sales forces of approximately 2,400 individuals in approximately 45 countries
internationally and over 3,400 individuals in the U.S. marketed our products
worldwide as of December 31, 2006. Sales in countries where we have direct
sales organizations accounted for approximately 94 percent of our net sales
during 2006. A network of distributors and dealers who offer our products
in
more than 50 countries worldwide accounts for our remaining sales. We also
have
a dedicated corporate sales organization in the U.S. focused principally
on
selling to major buying groups and integrated healthcare networks.
In
2006,
we sold our products to over 10,000 hospitals, clinics, out-patient facilities
and medical offices. We are not dependent on any single institution and
no
single institution accounted for more than 10 percent of our net sales in
2006. Large group purchasing organizations, hospital networks and other
buying
groups have, however, become increasingly important to our business and
represent a substantial portion of our U.S. net sales.
We
also
distribute certain products for third parties, including an introducer
sheath
and certain guidewires, as well as BPH devices, various graft materials,
and
pneumatic and laser lithotripters for use in connection with urology and
gynecology procedures. Our agreement to distribute certain guidewire and
sheath
products expired during the first quarter of 2006. While we have identified
replacements for these products, the sales level associated with the replacement
products has been, as expected, less than that of our previously distributed
products. Together, these distributed products represented less than two
percent of our 2006 net sales. Leveraging our sales and marketing strength,
we
expect to continue to seek new opportunities for distributing complementary
products as well as new technologies.
International
Operations
Internationally,
through 2006, we operated through three business units divided among the
geographic regions of Europe, Japan and Inter-Continental. Maintaining
and
expanding our international presence is an important component of our long-term
growth plan. Through our international presence, we seek to increase
net sales and market share, leverage relationships with leading physicians
and
their clinical research programs, accelerate the time to bring new products
to
market and gain access to worldwide technological developments that may
be
implemented across our product lines. After our acquisition of Guidant,
we
integrated Guidant’s international sales operations into our geographic regions.
Consistent with our geographic focus, the Guidant CRM business became a
business
unit within each country organization across Europe, Japan and
Inter-Continental. In the first quarter of 2007, we began operating through
four
international business units: Europe, Asia Pacific/Japan, Inter-Continental
and
Distributor Management.
International
sales accounted for approximately 38 percent of our net sales in 2006. Net
sales and operating income attributable to significant geographic areas
are
presented in Note N—Segment
Reporting
to our
2006 consolidated financial statements included in Item 8 of this
Form 10-K.
In
recent
years, we have expanded our direct sales presence worldwide so as to be
in a
position to take advantage of expanding market opportunities. As of
December 31, 2006, we had direct marketing and sales operations in
approximately 45 countries internationally. We believe that we will continue
to
leverage our infrastructure in markets where commercially appropriate and
to use
third parties in those markets where it is not economical or strategic
to
establish a direct presence.
We
have
five international manufacturing facilities in Ireland, one in Costa Rica
and
one in Puerto Rico. Presently, approximately 33 percent of our products
sold
worldwide are manufactured at these facilities. We also maintain an
international research and development
facility
in Ireland, a training facility in Tokyo, Japan, and a training and research
and
development center in Miyazaki, Japan. We currently share a training facility
in
Brussels, Belgium with Abbott.
Manufacturing
and Raw Materials
We
design
and manufacture the majority of our products in technology centers around
the
world. Many components used in the manufacture of our products are readily
fabricated from commonly available raw materials or off-the-shelf items
available from multiple supply sources. Certain items are custom made for
us to
meet our specifications. We believe that in most cases, redundant capacity
exists at our suppliers and that alternative sources of supply are available
or
could be developed within a reasonable period of time. We also have an
ongoing
program to identify single-source components and to develop alternative
back-up
supplies. However, in certain cases, we may not be able to quickly establish
additional or replacement suppliers for specific components or materials,
largely due to the regulatory approval system and the complex nature of
the
manufacturing processes employed by us and many suppliers. A reduction
or
interruption in supply, an inability to develop and validate alternative
sources
if required, or a significant increase in the price of raw materials or
components could adversely affect our operations and financial condition,
particularly materials or components related to our TAXUS® and PROMUS™
drug-eluting coronary stent systems and our CRM products.
Quality
Assurance
On
January 26, 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. 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 (PMA)
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. During 2005, in order
to
strengthen our corporate-wide quality controls, we established Project
Horizon a
corporate-wide cross-functional initiative to improve and harmonize our
overall
quality processes and systems. As part of Project Horizon, we have made
modifications to our process validation and complaint management
systems. Project Horizon resulted in the reallocation of significant
internal engineering and management resources to quality initiatives, as
well as
incremental spending, which has resulted in adjustments to product launch
schedules of certain products and the decision to discontinue certain other
product lines over time.
In
2006,
our Board of Directors created a Compliance and Quality Committee to monitor
our
compliance and quality initiatives. We believe we have identified solutions
to
the quality issues cited by the FDA, and we continue to make progress in
transitioning our organization to implement those solutions. We communicate
frequently and meet regularly with the FDA to apprise them of our progress.
The
FDA has communicated the need for us to complete substantially our
remediation efforts before they will re-inspect our facilities. We have
engaged
a third party to audit our enhanced quality systems in order to assess
our
Company-wide compliance prior to re-inspection by the FDA. We believe we
will be
ready for third-party audit in the second quarter of 2007.
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. This FDA
warning
letter followed an inspection by the FDA that was completed on September 1,
2005 and cited a number of observations. Guidant received a follow-up letter
from the FDA dated January 5, 2006. As stated in this follow-up letter,
until we have corrected the
identified
deficiencies, the FDA may not grant requests for exportation certificates
to
foreign governments or approve PMA applications for class III devices to
which the deficiencies described are reasonably related. The FDA conducted
a
further inspection of the CRM facility between December 15, 2005 and
February 9, 2006 and made one additional inspectional
observation. The
FDA
has concluded its reinspection of our CRM facilities. While we believe
this
reinspection went well, we may be required to take additional actions in
order
to comply with any FDA observations that we may receive.
We
are
committed to providing high quality products to our customers. To meet
this
commitment, we are implementing updated quality systems and concepts throughout
our organization. Our quality system starts with the initial product
specification and continues through the design of the product, component
specification process and the manufacturing, sales and servicing of the
product.
Our quality system is designed to build in quality and process control
and to
utilize continuous improvement concepts throughout the product life. These
systems are designed to enable us to satisfy the quality system regulations
of
the FDA with respect to products sold in the U.S. Many of our operations
are
certified under ISO 9001, ISO 9002, ISO 13485, ISO 13488, EN 46001 and
EN 46002
international quality system standards. ISO 9002 requires, among other
items, an
implemented quality system that applies to component quality, supplier
control
and manufacturing operations. In addition, ISO 9001 and EN 46001 require
an
implemented quality system that applies to product design. These certifications
can be obtained only after a complete audit of a company’s quality system by an
independent outside auditor. Maintenance of these certifications requires
that
these facilities undergo periodic re-examination.
We
maintain an ongoing initiative to seek ISO 14001 certification at our plants
around the world. ISO 14001, the environmental management system standard
in the
ISO 14000 series, provides a voluntary framework to identify key environmental
aspects associated with our businesses. We engage in continuous environmental
performance improvement around these aspects. At present, nine of our
manufacturing and distribution facilities have attained ISO 14001 certification.
This initiative is expected to continue until each of our manufacturing
facilities, including those we acquire, becomes certified.
Competition
We
encounter significant competition across our product lines and in each
market in
which our products are sold from various companies, some of which may have
greater financial and marketing resources than we do. Our primary competitors
have historically included Johnson & Johnson (including its subsidiary,
Cordis Corporation) and Medtronic, Inc. (including its subsidiary,
Medtronic AVE, Inc.), as well as a wide range of companies which sell a
single or limited number of competitive products or participate only in
a
specific market segment. Since we acquired Guidant, Abbott Laboratories
has
become a competitor of ours in the interventional cardiology market and
St. Jude
Medical, Inc. has become a competitor of ours in the CRM market, in
addition to the Neuromodulation market. We also face competition from
non-medical device companies, such as pharmaceutical companies, which may
offer
alternative therapies for disease states intended to be treated using our
products.
We
believe that our products compete primarily on the basis of their ability
to
safely and effectively perform diagnostic and therapeutic procedures in
a
less-invasive manner, including ease of use, reliability and physician
familiarity. In the current environment of managed care, economically motivated
buyers, consolidation among healthcare providers, increased competition
and
declining reimbursement rates, we have also increasingly been required
to
compete on the basis of price, value, reliability and efficiency. We
believe that our continued competitive success will depend upon our ability
to
create or acquire scientifically advanced technology, apply our
technology
cost-effectively and with superior quality across product lines and markets,
develop or acquire proprietary products, attract and retain skilled development
personnel, obtain patent or other protection for our products, obtain required
regulatory and reimbursement approvals, continually enhance our quality
systems, manufacture and successfully market our products either directly
or
through outside parties and supply sufficient inventory to meet customer
demand.
The
medical devices that we manufacture and market are subject to regulation
by
numerous regulatory bodies, including the FDA and comparable international
regulatory agencies. These agencies require manufacturers of medical devices
to
comply with applicable laws and regulations governing the development,
testing,
manufacturing, labeling, marketing and distribution of medical devices.
Devices
are generally subject to varying levels of regulatory control, the most
comprehensive of which requires that a clinical evaluation program be conducted
before a device receives approval for commercial distribution.
In
the
U.S., permission to distribute a new device generally can be met in one
of two
ways. The first process requires that a pre-market notification (a 510(k)
Submission) be made to the FDA to demonstrate that the device is as safe
and
effective as, or substantially equivalent to, a legally marketed device
that is
not subject to pre-market approval (PMA) (i.e., the “predicate” device). An
appropriate predicate device for a pre-market notification is one that
(i) was legally marketed prior to May 28, 1976, (ii) was approved
under a PMA but then subsequently reclassified from class III to
class II or I, or (iii) has been found to be substantially equivalent
and cleared for commercial distribution under a 510(k) Submission. Applicants
must submit descriptive data and, when necessary, performance data to establish
that the device is substantially equivalent to a predicate device. In some
instances, data from human clinical trials must also be submitted in support
of
a 510(k) Submission. If so, these data must be collected in a manner that
conforms to the applicable Investigational Device Exemption (IDE) regulations.
The FDA must issue an order finding substantial equivalence before commercial
distribution can occur. Changes to existing devices covered by a 510(k)
Submission which do not raise new questions of safety or effectiveness
can
generally be made by us without additional 510(k) Submissions. More significant
changes, such as new designs or materials, may require a separate 510(k)
with
data to support that the modified device remains substantially equivalent.
The
second process requires that an application for PMA be made to the FDA
to
demonstrate that the device is safe and effective for its intended use
as
manufactured. This approval process applies to certain class III devices.
In this case, two steps of FDA approval are generally required before marketing
in the U.S. can begin. First, we must comply with the applicable IDE regulations
in connection with any human clinical investigation of the device in the
U.S.
Second, the FDA must review our PMA application which contains, among other
things, clinical information acquired under the IDE. The FDA will approve
the
PMA application if it finds that there is a reasonable assurance that the
device
is safe and effective for its intended purpose.
The
FDA
can ban certain medical devices; detain or seize adulterated or misbranded
medical devices; order repair, replacement or refund of these devices;
and
require notification of health professionals and others with regard to
medical
devices that present unreasonable risks of substantial harm to the public
health. The FDA may also enjoin and restrain certain violations of the
Food,
Drug and Cosmetic Act and the Safe Medical Devices Act pertaining to medical
devices, or initiate action for criminal prosecution of such violations.
International sales of medical devices manufactured in the U.S. that are
not
approved by the FDA for use in the U.S., or are banned or deviate from
lawful
performance standards, are subject to FDA export
requirements.
Exported devices are subject to the regulatory requirements of each country
to
which the device is exported. Some countries do not have medical device
regulations, but in most foreign countries medical devices are regulated.
Frequently, regulatory approval may first be obtained in a foreign country
prior
to application in the U.S. to take advantage of differing regulatory
requirements. Most countries outside of the United States require that
product
approvals be recertified on a regular basis, generally every five years.
The
recertification process requires that we evaluate any device changes and
any new
regulations or standards relevant to the device and conduct appropriate
testing
to document continued compliance. Where recertification applications are
required, they must be approved in order to continue to sell our products
in
those countries.
In
the
European Union, we are required to comply with the Medical Devices Directive
and
obtain CE Mark certification in order to market medical devices. The CE
Mark
certification, granted following approval from an independent Notified
Body, is
an international symbol of adherence to quality assurance standards and
compliance with applicable European Medical Devices Directives. We also
comply
with all other foreign regulations such as the requirement that we obtain
Ministry of Health, Labor and Welfare approval before we can launch new
products
in Japan, including our TAXUS® Express2
coronary
stent system. The time required to obtain these foreign approvals to market
our
products may be longer or shorter than that required in the U.S., and
requirements for such approval may differ from those required by the FDA.
We
are
also subject to various environmental laws, directives and regulations
both in
the U.S. and abroad. Our operations, like those of other medical device
companies, involve the use of substances regulated under environmental
laws,
primarily in manufacturing and sterilization processes. We believe that
compliance with environmental laws will not have a material impact on our
capital expenditures, earnings or competitive position. Given the scope
and
nature of these laws, however, there can be no assurance that environmental
laws
will not have a material impact on our results of operations. We assess
potential environmental contingent liabilities on a quarterly basis. At
present,
we are not aware of any such liabilities which would have a material impact
on
our business. We are also certified with respect to the enhanced environmental
FTSE4Good criteria and are a constituent member of the London Stock
Exchange’s
FTSE4Good Index, which recognizes companies that meet certain corporate
responsibility standards.
Third-Party
Coverage and Reimbursement
Our
products are purchased by hospitals, doctors and other healthcare providers
who
are reimbursed by third-party payors, such as governmental programs (e.g.,
Medicare and Medicaid), private insurance plans and managed care programs,
for
the healthcare services provided to their patients. Third-party payors
may
provide or deny coverage for certain technologies and associated procedures
based on assessment criteria as determined by the third-party payor.
Reimbursement by third-party payors for these services is based on a wide
range
of methodologies that may reflect the services’ assessed resource costs,
clinical outcomes and economic value. These reimbursement methodologies
confer
different, and often conflicting, levels of financial risk and incentives
to
healthcare providers and patients, and these methodologies are subject
to
frequent refinements. Third-party payors are also increasingly adjusting
reimbursement rates and challenging the prices charged for medical products
and
services. There can be no assurance that our products will be automatically
covered by third-party payors, that reimbursement will be available or,
if
available, that the third-party payors’ coverage policies will not adversely
affect our ability to sell our products profitably.
Initiatives
to limit the growth of healthcare costs, including price regulation, are
also
underway in many countries in which we do business. Implementation of cost
containment initiatives and healthcare reforms in significant markets such
as
Japan, Europe and other international markets may limit the
price
of,
or the level at which reimbursement is provided for, our products and may
influence a physician’s selection of products used to treat patients.
Proprietary
Rights and Patent Litigation
We
rely
on non-disclosure and non-competition agreements with employees, consultants
and
other parties to protect, in part, trade secrets and other proprietary
technology. There can be no assurance that these agreements will not be
breached, that we will have adequate remedies for any breach, that others
will
not independently develop equivalent proprietary information or that third
parties will not otherwise gain access to our trade secrets and proprietary
knowledge.
There
has
been substantial litigation regarding patent and other intellectual property
rights in the medical device industry, particularly in the areas in which
we
compete. We have defended, and will continue to defend, ourself against
claims
and legal actions alleging infringement of the patent rights of others.
Adverse
determinations in any patent litigation could subject us to significant
liabilities to third parties, require us to seek licenses from third parties,
and, if licenses are not available, prevent us from manufacturing, selling
or
using certain of our products, which could have a material adverse effect
on us.
Additionally,
we may find it necessary to initiate litigation to enforce our patent rights,
to
protect our trade secrets or know-how and to determine the scope and validity
of
the proprietary rights of others. Patent litigation can be costly and
time-consuming, and there can be no assurance that our litigation expenses
will
not be significant in the future or that the outcome of litigation will
be
favorable to us. Accordingly, we may seek to settle some or all of our
pending
litigation. Settlement may include cross-licensing of the patents which
are the
subject of the litigation as well as our other intellectual property and
may
involve monetary payments to or from third parties.
Risk
Management
The
testing, marketing and sale of human healthcare products entails an inherent
risk of product liability claims. We are involved in various lawsuits arising
in
the normal course of business from product liability and securities claims.
We
are substantially self-insured with respect to general, product liability
and
securities claims. As a result of the economic factors currently impacting
the
insurance industry, meaningful liability insurance coverage became unavailable
due to its economically prohibitive cost.
In
connection with our acquisition of Guidant, the number of product liability
claims and other legal proceedings filed against us, including private
securities litigation and shareholder derivative suits, significantly increased.
Product liability and securities claims against us may be asserted in the
future
related to unknown events at the present time. 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 business. We believe
that
our risk management practices, including limited insurance coverage, are
reasonably adequate to protect against anticipated general, product liability
and securities litigation losses. However, unanticipated catastrophic losses
could have a material adverse impact on our financial position, results
of
operations and liquidity.
Employees
As
of
December 31, 2006, we had approximately 28,600 employees, including
approximately 14,300 in operations, 2,000 in administration, 4,600 in clinical,
regulatory and research and development and 7,700 in selling, marketing,
distribution and related administrative support. Of these employees,
approximately 14,500 were employed outside the U.S., approximately 6,200 of
which are included in the Operations function. We believe that the
continued success of our business will depend, in part, on our ability
to
attract and retain qualified personnel.
Seasonality
Our
worldwide sales do not reflect any significant degree of seasonality; however,
customer purchases have been lighter in the third quarter of prior years
than in
other quarters. This reflects, among other factors, lower demand during
summer
months, particularly in European countries.
Available
Information
Copies
of
our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 are available free of charge on our website (www.bostonscientific.com)
as soon as reasonably practicable after we electronically file the material
with
or furnish it to the SEC. Our Corporate Governance Guidelines and Code
of
Conduct, which applies to all of our directors, officers and employees,
including our Board of Directors, Chief Executive Officer, Chief Financial
Officer and Corporate Controller, are also available on our website (along
with
any amendments to those documents). Any amendments to or waivers for executive
officers or directors of our Code of Conduct will be disclosed on our website
promptly after the date of any such amendment or waiver. Printed copies
of these
posted materials are also available free of charge to shareholders who
request
them in writing from Investor Relations, One Boston Scientific Place, Natick,
MA
01760-1537. Information on our website or connected to our website is not
incorporated by reference into this Form 10-K.
Cautionary
Statement for Purposes of the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995
Certain
statements that we may make from time to time, including statements contained
in
this report and information incorporated by reference into this report,
constitute “forward-looking statements.” Forward-looking statements may be
identified by words like “anticipate,” “expect,” “project,” “believe,” “plan,”
“estimate,” “intend” and similar words used in connection with, among other
things, discussions of our financial performance, growth strategy, regulatory
approvals,
product development or new product launches, market position, sales efforts,
intellectual property matters or acquisitions and divestitures. These
forward-looking statements are based on our beliefs, assumptions and estimates
using information available to us at the time and are not intended to be
guarantees of future events or performance. If our underlying assumptions
turn
out to be incorrect, or if certain risks or uncertainties materialize,
actual
results could vary materially from the expectations and projections expressed
or
implied by our forward-looking statements. As a result, investors are cautioned
not to place undue reliance on any of our forward-looking statements.
We
do not
intend to update the forward-looking statements below or the risk factors
described in Item 1A under the heading “Risk Factors” even if new information
becomes available or other events occur in the future. We have identified
these
forward-looking statements below and the risk factors described in Item
1A under
the heading “Risk Factors” in order to take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Certain
factors that could cause actual results to differ materially from those
expressed in forward-looking statements are contained below and in the
risk
factors described in Item 1A under the heading “Risk Factors.”
CRM
Business
| · |
The
recovery of the CRM market to historical growth rates and our
ability to
regain CRM market share and increase CRM net
sales;
|
| · |
The
overall performance of and referring physician, implanting physician
and
patient confidence in our and other CRM products and technologies,
including our LATITUDE® Patient Management System and Frontier™
CRM
technology;
|
| · |
The
results of CRM clinical trials undertaken by us, our competitors
or other
third parties;
|
| · |
Our
ability to launch various products utilizing the Frontier CRM
technology, our next generation CRM pulse generator platform,
in the U.S.
over the next 36 months and to expand our CRM market position through
reinvestment in our CRM products and
technologies;
|
| · |
Our
ability to retain our CRM sales force and other key
personnel;
|
| · |
Competitive
offerings in the CRM market and the timing of receipt of regulatory
approvals to market existing and anticipated CRM products and
technologies; and
|
| · |
Our
ability to avoid disruption in the supply of certain components
or
materials or to quickly secure additional or replacement components
or
materials on a timely basis.
|
Coronary
Stent Business
|
·
|
Volatility
in the coronary stent market, competitive offerings and the timing
of
receipt of regulatory approvals to market existing and anticipated
drug-eluting stent technology and other coronary and peripheral
stent
platforms;
|
|
·
|
Our
ability to launch our TAXUS® Express2™
coronary
stent system in Japan during the second half of 2007, and to
launch our
next-generation drug-eluting stent system, the TAXUS® Liberté™ coronary
stent system, in the U.S., subject to regulatory approval, and
to maintain
or expand our worldwide market leadership positions through reinvestment
in our drug-eluting stent program;
|
|
·
|
The
continued availability of our TAXUS stent system in sufficient
quantities
and mix, our ability to prevent disruptions to our TAXUS stent
system
manufacturing processes and to maintain or replenish inventory
levels
consistent with forecasted demand around the world as we transition
to
next-generation stent products;
|
| · |
The
impact of concerns relating to late stent thrombosis on the size
of the
coronary stent market, distribution of share within the coronary
stent
market in the U.S. and around the world, the average number of
stents used
per procedure and average selling prices;
|
|
·
|
The
overall performance of and continued physician confidence in
our and other
drug-eluting stents, our ability to adequately address concerns
regarding
the risk of late stent thrombosis, and the results of drug-eluting
stent
clinical trials undertaken by us, our competitors or other third
parties;
|
|
·
|
Our
ability to sustain or increase the penetration rate of drug-eluting
stent
technology in the U.S. and our European and Inter-Continental
markets;
|
| · |
Our
ability to take advantage of our position as one of two early
entrants in
the U.S. drug-eluting stent market, to anticipate competitor
products as
they enter the market and to respond to the challenges presented
as
additional competitors enter the U.S. drug-eluting stent market;
|
|
·
|
Our
ability to manage inventory levels, accounts receivable, gross
margins and
operating expenses relating to our drug-eluting stent systems
and other
product franchises and to react effectively to worldwide economic
and
political conditions;
|
| · |
Our
ability to manage the launch of our PROMUS™ everolimus-eluting stent
system and the supply of this stent system in sufficient quantities
and
mix; and
|
| · |
Our
ability to manage the mix of our PROMUS stent system revenue
relative to
our total drug-eluting stent revenue and maintain our overall
profitability as a percentage of
revenue.
|
Litigation
and Regulatory Compliance
|
·
|
Any
conditions imposed in resolving, or any inability to resolve,
our
outstanding warning letters or other FDA matters, as well as
risks
generally associated with our regulatory compliance quality systems
and
complaint handling;
|
| · |
The
effect of our litigation, risk management practices, including
self-insurance, and compliance activities on our loss contingency,
legal
provision and cash flow;
|
|
·
|
The
impact of our stockholder derivative and class action, patent,
product
liability, contract and other litigation and other legal
proceedings;
|
|
·
|
The
ongoing, inherent risk of potential physician communications
or field
actions related to medical devices;
|
| · |
Costs
associated with our incremental compliance and quality initiatives,
including Project Horizon; and
|
| · |
The
availability and rate of third-party reimbursement for our products
and
procedures.
|
Innovation
|
·
|
Our
ability to complete planned clinical trials successfully, to
obtain
regulatory approvals and to develop and launch products on a
timely basis
within cost estimates, including the successful completion of
in-process
projects from purchased research and
development;
|
|
·
|
Our
ability to manage research and development and other operating
expenses
consistent with our expected revenue growth;
|
|
·
|
Our
ability to fund and achieve benefits from our focus on internal
research
and development and external alliances as well as our ability
to
capitalize on opportunities across our businesses;
|
|
·
|
Our
ability to develop products and technologies successfully in
addition to
our drug-eluting stent and cardiac rhythm management
technologies;
|
|
·
|
Our
ability to develop next-generation products and technologies
within our
drug-eluting stent and cardiac rhythm management
business;
|
|
·
|
Our
failure to succeed at, or our decision to discontinue, any of
our growth
initiatives;
|
|
·
|
Our
ability to integrate the acquisitions and other strategic alliances
we
have consummated, including
Guidant;
|
|
·
|
Our
decision to exercise, or not to exercise, options to purchase
certain
companies party to our strategic alliances and our ability to
fund with
cash or common stock these and other acquisitions, or to fund
contingent
payments associated with these alliances;
|
|
·
|
The
timing, size and nature of strategic initiatives, market opportunities
and
research and development platforms available to us and the ultimate
cost
and success of these initiatives; and
|
|
·
|
Our
ability to successfully identify, develop and market new products
or the
ability of others to develop products or technologies that render
our
products or technologies noncompetitive or
obsolete.
|
International
Markets
|
·
|
Dependency
on international net sales to achieve growth;
|
|
·
|
Risks
associated with international operations, including compliance
with local
legal and regulatory requirements as well as reimbursement practices
and
policies; and
|
|
·
|
The
potential effect of foreign currency fluctuations and interest
rate
fluctuations on our net sales, expenses and resulting margins.
|
Liquidity
|
·
|
Our
ability to generate sufficient cash flow to fund operations and
capital
expenditures, as well as our strategic investments over the next
twelve
months and to maintain borrowing flexibility beyond the next
twelve
months;
|
|
·
|
Our
ability to access the public capital markets and to issue debt
or equity
securities on terms reasonably acceptable to us;
|
|
Our
ability to achieve a 21 percent effective tax rate, excluding certain
charges, during 2007 and to recover substantially all of our
deferred tax
assets;
|
| · |
Our
ability to maintain investment-grade credit ratings and satisfy
our
financial covenants;
|
| · |
Our
ability to generate sufficient cash flow to effectively manage
our debt
levels and minimize the impact of interest rate fluctuations
on our
floating-rate debt; and
|
|
·
|
Our
ability to better align expenses with future expected revenue
levels and
reallocate resources to support our future growth.
|
Other
|
·
|
Risks
associated with significant changes made or to be made to our
organizational structure or to the membership of our executive
committee;
and
|
|
·
|
Risks
associated with our acquisition of Guidant Corporation, including,
among
other things, the indebtedness we have incurred and the integration
costs
and challenges we will continue to face.
|
Several
important factors, in addition to the specific factors discussed in connection
with each forward-looking statement individually and the risk factors described
in Item 1A under the heading “Risk Factors,” could affect our future results and
growth rates and could cause those results and rates to differ materially
from
those expressed in the forward-looking statements and the risk factors
contained
in this report. These additional factors include, among other things, future
economic, competitive, reimbursement and regulatory conditions, new product
introductions, demographic trends, intellectual property, financial market
conditions and future business decisions made by us and our competitors,
all of
which are difficult or impossible to predict accurately and many of which
are
beyond our control. Therefore, we wish to caution each reader of this report
to
consider carefully these factors as well as the specific factors discussed
with
each forward-looking statement and risk factor in this report and as disclosed
in our filings with the SEC. These factors, in some cases, have affected
and in
the future (together with other factors) could affect our ability to implement
our business strategy and may cause actual results to differ materially
from
those contemplated by the statements expressed in this report.
In
addition to the other information contained in this Form 10-K and the
exhibits hereto, the following risk factors should be considered carefully
in
evaluating our business. Our business, financial condition or results of
operations could be materially adversely affected by any of these risks.
This
section contains forward-looking statements. You should refer to the explanation
of the qualifications and limitations on forward-looking statements set
forth at
the end of Item 1 of this Form 10-K. Additional risks not presently known
to us or that we currently deem immaterial may also adversely affect our
business, financial condition or results of operations.
We
derive a significant portion of our revenue from the sale of drug-eluting
coronary stent systems and a decline in market size or our market share
of
drug-eluting stents may adversely affect our results of operations or
financial
condition.
In
addition, lower device utilization per procedure and a decline in the overall
percutaneous coronary intervention market contributed to the decline in
our
TAXUS stent system sales in 2006. There can be no assurance that these
concerns
will be alleviated in the near term or that drug-eluting stent penetration
rates
will return to previous levels. Our TAXUS® coronary stent system and Johnson
& Johnson’s CYPHER® drug-eluting stent system are currently the only two
drug-eluting stents available in the U.S. market. We expect our share of
the
drug-eluting stent market, as well as unit prices, to continue to be adversely
affected as additional significant competitors enter the drug-eluting stent
market, which began during the third quarter of 2005 internationally and
is
expected to continue to occur as early as the second half of 2007 in the
U.S. In
July 2005, Medtronic, Inc. received approval from European regulators
to begin commercial sales of its Endeavor® drug-eluting stent system in the
European market. As a result of Abbott’s acquisition of Guidant’s drug-eluting
stent portfolio, Abbott sells its XIENCE™ V everolimus-eluting stent system in
competition with us in certain international markets. In addition, Conor
Medsystems, Inc., which was recently acquired by Johnson & Johnson,
sells its CoStar® paclitaxel-eluting stent system in competition with us in
certain international markets.
The
manufacture of our TAXUS® coronary stent system involves the integration of
multiple technologies, critical components, raw materials and complex processes.
Significant favorable or unfavorable changes in forecasted demand, as well
as
disruptions associated with our TAXUS® stent manufacturing process, may impact
our inventory levels. Variability in expected demand or the timing of the
launch
of next-generation products may result in excess or expired inventory positions
and future inventory charges, which may adversely impact our results from
operations. We share with Abbott rights to Guidant’s XIENCE™ V
everolimus-eluting stent program. As a result, delays in receipt of regulatory
approvals for the XIENCE™ V everolimus-eluting stent system, receipt of
insufficient quantities of the PROMUS everolimus-eluting stent from Abbott
or
material nonacceptance of these stents in the marketplace could adversely
affect
our results from operations, as well as our ability to effectively differentiate
ourselves from our competitors in the drug-eluting stent market as the
leading
company with two drug-eluting stent programs.
The
worldwide CRM market growth rates declined during 2006 and if the CRM market
does not recover, our results of operation and financial condition may
be
adversely impacted.
During
2005 and 2006, the operating and financial performance of our CRM business
has
been adversely impacted by various implantable defibrillator and pacemaker
system field actions in the industry and a corresponding reduction in CRM
market
growth rates. We believe that field actions in the industry contributed
to our
CRM division having a lower market share for implantable defibrillator
and
pacemaker systems for 2006 as compared to 2005. The worldwide CRM market
growth
rate, including the U.S. defibrillator market growth rate, declined during
the
first three quarters of 2006; these growth levels are below those experienced
in
recent years. The U.S. defibrillator market represents approximately half
of the
worldwide CRM market. There can be no assurance that the CRM market will
return
to its historical growth rate
or
that
we will be able to regain CRM market share or increase net sales in a timely
manner, if at all.
Because
we derive a significant amount of our revenues from our cardiovascular
business,
changes in market or regulatory conditions that impact that business
or our
inability to develop non-cardiovascular products, could have a material
adverse
effect on our business, financial condition or results of
operation.
During
2006, approximately 80 percent of our net sales were derived from our
cardiovascular business, which includes our interventional cardiology,
cardiac
rhythm management and cardiovascular divisions. As a result, our sales
growth
and profitability from our cardiovascular business may be limited by
risks and
uncertainties related to market or regulatory conditions that impact
that
business. For example, if the worldwide CRM market and the U.S. ICD market
do not return to their historical growth rates or we are unable to regain
CRM
market share or increase CRM net sales, it may adversely affect our business,
financial condition or results of operation. Coronary stent revenue
represented approximately 32 percent of our consolidated net sales for
2006. If the decline in U.S. drug-eluting stent market penetration
attributable to concerns regarding the risk of late stent thrombosis
following
the use of drug-eluting stents or the declines in device utilization
per
procedure and overall percutaneous coronary intervention volumes continue,
there
can be no assurance that the drug-eluting stent market will recover to
previous
levels which may have a material adverse effect on our business.
Similarly, our inability to develop products and technologies successfully
in
addition to our drug-eluting stent and cardiac rhythm management technologies
could further expose us to fluctuations and uncertainties in these
markets.
We
may be unable to resolve issues related to our warning letters in a timely
manner, which could delay the production and sale of our products and have
an
adverse impact on our business, financial condition and results of
operation.
We
are
currently taking remedial action in response to certain deficiencies of
our
quality systems as cited by the FDA in its warning letters to us. For example,
on January 26, 2006, we received a corporate warning letter from the FDA
notifying us of serious regulatory problems at three of our 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 (PMA) applications
for our
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. If we are unable to
resolve
the issues raised by the FDA in its warning letters to the satisfaction
of the
FDA on a timely basis, we may not be able to launch our new class III
devices as planned, including our Taxus® Liberté™ drug-eluting stent system in
the United States, which may weaken our competitive position in the markets
in
which we participate.
In
addition, in December 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. This
FDA
warning letter followed an inspection by the FDA that was completed on
September 1, 2005 and cited a number of observations. Guidant received a
follow-up letter from the FDA dated January 5, 2006. As stated in this
follow-up letter, until the identified deficiencies have been corrected,
the FDA
may not grant requests for exportation certificates to foreign governments
or
approve PMA applications for class III devices to which the
deficiencies described are reasonably related. The FDA conducted a further
inspection of the CRM facility between December 15, 2005 and
February 9, 2006 and made one additional inspectional observation. The FDA
has concluded its reinspection of our CRM facilities. We may be required
to take
additional actions in order to comply with any FDA observations that we
may
receive.
We
may
face enforcement actions in connection with these FDA warning letters,
including
injunctive relief, consent decrees or civil fines. While we are working
with the
FDA to resolve these issues, this work has required and will continue to
require
the dedication of significant incremental internal and external resources
and
has resulted in adjustments to the product launch schedules of certain
products
and the decision to discontinue certain other product lines over time.
There can
be no assurances regarding the length of time or cost it will take us to
resolve
these issues to the satisfaction of the FDA. In addition, if our remedial
actions are not satisfactory to the FDA, we may have to devote additional
financial and human resources to our efforts and the FDA may take further
regulatory actions against us including, but not limited to, seizing our
product
inventory, obtaining a court injunction against further marketing of our
products, assessing civil monetary penalties or imposing a consent decree
on us,
which could result in further regulatory constraints, including the governance
of our quality system by a third party. If we or our manufacturers fail
to
adhere to QSR or ISO requirements, this could delay production of our products
and lead to fines, difficulties in obtaining regulatory clearances, recalls
or
other consequences, which could in turn have a material adverse effect
on our
financial condition or results of operations.
We
are subject to extensive medical device regulation which may impede or
hinder
the approval process for our products and, in some cases, may not ultimately
result in approval or may result in the recall or seizure of previously
approved
products.
Our
products, development activities and manufacturing processes are subject
to
extensive and rigorous regulation by the FDA pursuant to the federal Food,
Drug,
and Cosmetic Act (the FDC Act), by comparable agencies in foreign countries,
and
by other regulatory agencies and governing bodies. Under the FDC Act, medical
devices must receive FDA clearance or approval before they can be commercially
marketed in the U.S. In addition, most major markets for medical devices
outside
the U.S. require clearance, approval or compliance with certain standards
before
a product can be commercially marketed. The process of obtaining marketing
approval or clearance from the FDA for new products, or with respect to
enhancements or modifications to existing products, could:
•
take
a
significant period of time;
•
require
the expenditure of substantial resources;
•
involve
rigorous pre-clinical and clinical testing;
•
require
changes to the products; and
•
result
in limitations on the indicated uses of the products.
Countries
around the world have recently adopted more stringent regulatory requirements
that are expected to add to the delays and uncertainties associated with
new
product releases, as well as the clinical and regulatory costs of supporting
those releases. Even after products have received marketing approval or
clearance, product approvals and clearances by the FDA can be withdrawn
due to
failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial approval. There can be no assurance that we
will
receive the required clearances from the FDA for new products or modifications
to existing products on a timely basis or that any FDA approval will not
be
subsequently withdrawn.
In
addition, regulations regarding the development, manufacture and sale of
medical
devices are subject to future change. We cannot predict what impact, if
any,
those changes might have on our business. Failure to comply with regulatory
requirements could have a material adverse effect on our business, financial
condition and results of operations. Later discovery of previously unknown
problems with a product or manufacturer could result in fines, delays or
suspensions of regulatory clearances, seizures or recalls of products,
operating
restrictions and/or criminal prosecution. The failure to receive product
approval clearance on a timely basis, suspensions of regulatory clearances,
seizures or recalls of products or the withdrawal of product approval by
the FDA
could have a material adverse effect on our business, financial condition
or
results of operations.
As
a
device manufacturer, we are required to register with the FDA and are subject
to
periodic inspection by the FDA for compliance with the FDA’s Quality System
Regulation (QSR) requirements, which require manufacturers of medical devices
to
adhere to certain regulations, including testing, quality control and
documentation procedures. In addition, the federal Medical Device Reporting
regulations require us to provide information to the FDA whenever there
is
evidence that reasonably suggests that a device may have caused or contributed
to a death or serious injury or, if a malfunction were to occur, could
cause or
contribute to a death or serious injury. Compliance with applicable regulatory
requirements is subject to continual review and is
rigorously
monitored through periodic inspections by the FDA. In the European Community,
we
are required to maintain certain ISO certifications in order to sell our
products and must undergo periodic inspections by notified bodies to obtain
and
maintain these certifications.
Pending
and future intellectual property litigation could be costly and disruptive
to
us.
We
operate in an industry that is susceptible to significant intellectual
property
litigation and, in recent years, it has been common for companies in the
medical
device field to aggressively challenge the patent rights of other companies
in
order to prevent the marketing of new devices. We are currently the subject
of
various patent litigation proceedings and other proceedings described in
more
detail under Item
3. Legal Proceedings.
Intellectual property litigation is expensive, complex and lengthy and
its
outcome is difficult to predict. Pending or future patent litigation may
result
in significant royalty or other payments or injunctions that can prevent
the
sale of products and may significantly divert the attention of our technical
and
management personnel. In the event that our right to market any of our
products
is successfully challenged, and if we fail to obtain a required license
or are
unable to design around a patent, our business, financial condition or
results
of operations could be materially adversely affected.
We
may not effectively be able to protect our intellectual property rights
which could have an adverse effect on our business, financial condition
or
results of operations.
The
medical device market in which we primarily participate is in large part
technology driven. Physician customers, particularly in interventional
cardiology, move 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 or
other
products infringe patents owned or licensed by them. Adverse outcomes in
one or more of these 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. In addition, damage awards related to historical
sales could be material. We have similarly asserted that stent systems
or other
products sold by these companies infringe patents owned or licensed by
us.
Patents
and other proprietary rights are and will be essential to our business,
and our
ability to compete effectively with other companies will be dependent upon
the
proprietary nature of our technologies. We rely upon trade secrets, know-how,
continuing technological innovations, strategic alliances and licensing
opportunities to develop, maintain and strengthen our competitive position.
We
pursue a policy of generally obtaining patent protection in both the U.S.
and
abroad for patentable subject matter in our proprietary devices and also
attempt
to review
third-party
patents and patent applications to the extent publicly available to develop
an
effective patent strategy, avoid infringement of third-party patents, identify
licensing opportunities and monitor the patent claims of others. We currently
own numerous U.S. and foreign patents and have numerous patent applications
pending. We also are party to various license agreements pursuant to which
patent rights have been obtained or granted in consideration for cash,
cross-licensing rights or royalty payments. No assurance can be made that
any
pending or future patent applications will result in issued patents, that
any
current or future patents issued to, or licensed by, us will not be challenged
or circumvented by our competitors, or that our patents will not be found
invalid.
In
addition, we may have to take legal action in the future to protect our
patents,
trade secrets or know-how or to assert them against claimed infringement
by
others. Any legal action of that type could be costly and time consuming
to us
and no assurances can be made that any lawsuit will be successful. We are
generally involved as both a plaintiff and a defendant in a number of patent
infringement and other intellectual property-related actions. We are involved
in
numerous patent-related claims with our competitors, including
Johnson & Johnson.
The
invalidation of key patents or proprietary rights that we own, or an
unsuccessful outcome in lawsuits to protect our intellectual property,
could
have a material adverse effect on our business, financial position or results
of
operations.
Pending
and future product liability claims and other litigation, including private
securities litigation, shareholder derivative suits and contract litigation,
may
adversely affect our business, reputation and ability to attract and retain
customers.
The
design, manufacture and marketing of medical devices of the types that
we
produce entail an inherent risk of product liability claims. Many of the
medical
devices that we manufacture and sell are designed to be implanted in the
human
body for long periods of time or indefinitely. A number of factors could
result
in an unsafe condition or injury to, or death of, a patient with respect
to
these or other products that we manufacture or sell, including component
failures, manufacturing flaws, design defects or inadequate disclosure
of
product-related risks or product-related information. These factors could
result
in product liability claims, a recall of one or more of our products or
a safety
alert relating to one or more of our products. Product liability claims
may be
brought by individuals or by groups seeking to represent a class.
We
are
currently the subject of numerous product liability claims and other litigation,
including private securities litigation and shareholder derivative suits
including, but not limited to, the claims and litigation described under
Item 3. Legal
Proceedings.
In
connection with our acquisition of Guidant, the number of product liability
claims and other legal proceedings filed against us, including private
securities litigation and shareholder derivative suits, significantly increased.
We are currently involved in litigation involving a contract dispute with
certain former shareholders of Advanced Bionics Corporation, one of our
subsidiaries. The outcome of this litigation could prevent us from operating
the
Advanced Bionics business in the manner that we expected at the time of
acquisition.
The
outcome of litigation, particularly class action lawsuits, is difficult
to
assess or quantify. Plaintiffs in these types of lawsuits often seek recovery
of
very large or indeterminate amounts, including not only actual damages,
but also
punitive damages. The magnitude of the potential loss relating to these
lawsuits
may remain unknown for substantial periods of time. In addition, the cost
to
defend against any future litigation may be significant. Further, we are
substantially self-insured with respect to general, product liability claims
and
securities litigation. As a result of economic factors currently impacting
the
insurance industry, meaningful product liability and
securities
litigation insurance coverage has become unavailable due to its economically
prohibitive cost. The absence of significant third-party insurance coverage
increases our potential exposure to unanticipated claims and 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
may not be successful in our strategic acquisitions of, investments in
or
alliances with, other companies and businesses, which have been a significant
source of historical growth for us.
Our
strategic acquisitions, investments and alliances are intended to further
expand
our ability to offer customers effective, high quality medical devices
that
satisfy their interventional needs. Many of these alliances involve equity
investments and often give us the option to acquire the other company or
assets
of the other company in the future. If we are unsuccessful in our acquisitions,
investments and alliances, we may be unable to continue to grow our business
significantly or may record asset impairment charges in the future. These
acquisitions, investments and alliances have
been
significant sources of growth for us. The success of any acquisition, investment
or alliance that we may undertake will depend on a number of factors,
including:
•
our
ability to identify suitable opportunities for acquisition, investment
or
alliance, if at all;
•
our
ability to finance any future acquisition, investment or alliance on terms
acceptable to us, if at all;
•
whether
we are able to establish an acquisition, investment or alliance on terms
that
are satisfactory to us, if at all;
•
the
strength of the other companies’ underlying technology and ability to execute;
• intellectual
property and litigation related to these technologies; and
•
our
ability to successfully integrate the acquired company or business with
our
existing business, including the ability to adequately fund acquired in-process
research and development projects.
If
we are
unsuccessful in our acquisitions, investments and alliances, we may be
unable to
continue to grow our business significantly or may record asset impairment
charges in the future.
We
incurred substantial indebtedness in connection with our acquisition of
Guidant
and if we are unable to manage our debt levels and maintain our investment-grade
credit ratings, it could have an adverse effect on our financial condition
or
results of operations.
We
had
outstanding borrowings of $8.9 billion at December 31, 2006, attributable
in
large part to our acquisition of Guidant. We will be required to use a
significant portion of our operating cash flow to reduce our outstanding
debt
obligations over the next several years. We are examining all of our operations
in order to identify cost improvement measures that will better align operating
expenses with expected revenue levels and cash flow, and may decide to
sell
certain non-strategic assets or implement other strategic initiatives to
generate proceeds that would be available for debt repayment. Certain of
our
debt agreements contain financial covenants that require us to maintain
specified financial ratios. If we are unable to maintain these ratios,
we may be
required to obtain waivers from our lenders and no assurance can be made
that
our lenders
would
grant such waivers on favorable terms or at all. While our credit ratings
are
currently investment grade, our Moody’s and S&P ratings outlooks are
currently negative. Our inability to maintain our investment grade credit
ratings could make it more expensive for us to borrow funds or issue debt
securities in the public capital markets on terms reasonably acceptable
to
us.
Our
future growth is dependent upon the development of new products, which
requires
significant research and development, clinical trials and regulatory approvals,
all of which are very expensive and time-consuming and may not result in
a
commercially viable product.
In
order
to develop new products and improve current product offerings, we focus
our
research and development programs largely on the development of next-generation
and novel technology offerings across multiple programs and divisions,
particularly in our drug-eluting stent and CRM programs. We expect to
launch our TAXUS® Liberté™ coronary stent system in the U.S., subject to
regulatory approval. In addition, we expect to continue to invest in our
CRM
technologies, including our LATITUDE® Patient Management System and the
Frontier™ CRM
technology. If we are unable to develop and launch these and other products
as
anticipated, our ability to maintain or expand our market position in the
drug-eluting stent and CRM markets may be adversely impacted.
Further,
we expect to invest selectively in areas outside of drug-eluting stent
and CRM
technologies. There can be no assurance that these or other technologies
will
achieve technological feasibility, obtain regulatory approval or gain market
acceptance. A delay in the development or approval of these technologies
or our
decision to reduce funding of these projects may adversely impact the
contribution of these technologies to our future growth.
As
a part
of the regulatory process of obtaining marketing clearance from the FDA
for new
products, we conduct and participate in numerous clinical trials with a
variety
of study designs, patient populations and trial endpoints. 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 ability to obtain product approvals
from
the FDA, our position in, and share of, the markets in which we participate
and
our business, financial condition, results of operations or future
prospects.
We
face intense competition and may not be able to keep pace with the rapid
technological changes in the medical devices industry, which could have
an
adverse effect on our business, financial condition or results of operations.
The
medical device market is highly competitive. We encounter significant
competition across our product lines and in each market in which our products
are sold from various medical device companies, some of which may have
greater
financial and marketing resources than we do. Our primary competitors have
historically included Johnson & Johnson (including its subsidiary,
Cordis Corporation) and Medtronic, Inc. (including its subsidiary,
Medtronic AVE, Inc.). Through our acquisition of Guidant, Abbott has become
a primary competitor of ours in the interventional cardiology market and
St.
Jude Medical, Inc. has become a competitor of ours in the CRM market and in
the Neuromodulation market. In addition, we face competition from a wide
range
of companies that sell a single or a limited number of competitive products
or
which participate only in a specific market segment, as well as from non-medical
device companies, including pharmaceutical companies, which may offer
alternative therapies for disease states intended to be treated using our
products.
Additionally,
the medical device market is characterized by extensive research and
development, and rapid technological change. Developments by other companies
of
new or improved products,
processes
or technologies, in particular in the drug-eluting stent and CRM markets,
may
make our products or proposed products obsolete or less competitive and
may
negatively impact our revenues. We are required to devote continued efforts
and
financial resources to develop or acquire scientifically advanced technologies
and products, apply our technologies cost-effectively across product lines
and
markets, attract and retain skilled development personnel, obtain patent
and
other protection for our technologies and products, obtain required regulatory
and reimbursement approvals and successfully manufacture and market our
products
consistent with our quality standards. If we fail to develop new products
or
enhance existing products, it could have a material adverse effect on our
business, financial condition or results of operations.
Because
we derive a significant amount of our revenues from international operations
and
a significant percentage of our future growth is expected to come from
international operations, changes in international economic or regulatory
conditions could have a material impact on our business, financial condition
or
results of operations.
Sales
outside the U.S. accounted for approximately 38 percent of our net sales
in
2006. Additionally, a significant percentage of our future growth is expected
to
come from international operations. As a result, our sales growth and
profitability from our international operations may be limited by risks
and
uncertainties related to economic conditions in these regions, foreign
currency
fluctuations, exchange rate fluctuations, regulatory and reimbursement
approvals, competitive offerings, infrastructure development, rights to
intellectual property and our ability to implement our overall business
strategy. Further, international markets are also being affected by economic
pressure to contain reimbursement levels and healthcare costs. The trend
in
countries around the world, including Japan, toward more stringent regulatory
requirements for product clearance, changing reimbursement models and more
rigorous inspection and enforcement activities has generally caused or
may cause
medical device manufacturers to experience more uncertainty, delay, risk
and
expense. In addition, we are required to renew regulatory approvals and
obtain
exportation certificates to foreign governments in order to market our
products
in certain international jurisdictions, which may require additional testing
and
documentation. These approvals and certificates have been impacted by the
FDA
warning letters we have received. If sufficient resources are not available
to
renew these approvals or these approvals are not timely renewed, our ability
to
market our full line of existing products within these jurisdictions may
be
limited. Any significant changes in the competitive, political, legal,
regulatory, reimbursement or economic environment where we conduct international
operations may have a material impact on our business, financial condition
or
results of operations.
Our
products are purchased principally by hospitals or physicians, which typically
bill various third-party payors, including governmental programs (e.g.,
Medicare
and Medicaid), private insurance plans and managed care plans, for the
healthcare services provided to their patients. The ability of customers
to
obtain appropriate reimbursement for their products and services from private
and governmental third-party payors is critical to the success of medical
technology companies. The availability of reimbursement affects which products
customers purchase and the prices they are willing to pay. Reimbursement
varies
from country to country and can significantly impact the acceptance of
new
products and services. After we develop a promising new product, we may
find
limited demand for the product unless reimbursement approval is obtained
from
private and governmental third-party payors. Further legislative or
administrative
reforms
to the U.S. or international reimbursement systems in a manner that
significantly reduces reimbursement for procedures using our medical devices
or
denies coverage for those procedures could have a material adverse effect
on our
business, financial condition or results of operations.
Major
third-party payors for hospital services in the U.S. and abroad continue
to work
to contain healthcare costs. The introduction of cost containment incentives,
combined with closer scrutiny of healthcare expenditures by both private
health
insurers and employers, has resulted in increased discounts and contractual
adjustments to hospital charges for services performed and has shifted
services
between inpatient and outpatient settings. Initiatives to limit the increase
of
healthcare costs, including price regulation, are also underway in several
countries in which we do business. Hospitals or physicians may respond
to these
cost-containment pressures by substituting lower cost products or other
therapies for our products. In light of the Guidant product recalls, third-party
payors may seek claims and further recourse against us for the recalled
defibrillator and pacemaker systems for which Guidant had previously received
reimbursement.
Consolidation
in the healthcare industry could lead to demands for price concessions
or the
exclusion of some suppliers from certain of our significant market segments,
which could have an adverse effect on our business, financial condition
or
results of operations.
The
cost
of healthcare has risen significantly over the past decade and numerous
initiatives and reforms initiated by legislators, regulators and third-party
payors to curb these costs have resulted in a consolidation trend in the
healthcare industry, including hospitals. This in turn has resulted in
greater
pricing pressures and the exclusion of certain suppliers from important
market
segments as group purchasing organizations, independent delivery networks
and
large single accounts continue to consolidate purchasing decisions for
some of
our hospital customers. We expect that market demand, government regulation,
third-party reimbursement policies and societal pressures will continue
to
change the worldwide healthcare industry, resulting in further business
consolidations and alliances among our customers and competitors, which
may
reduce competition, exert further downward pressure on the prices of our
products and may adversely impact our business, financial condition or
results
of operations.
We
rely on external manufacturers to supply us with materials and components
used
in our products and any disruption of such sources of supply could adversely
impact our production efforts.
We
vertically integrate operations where integration provides significant
cost,
supply or quality benefits. However, we purchase many of the materials
and
components used in manufacturing our products, some of which are custom
made.
Certain supplies are purchased from single-sources due to quality
considerations, costs or constraints resulting from regulatory requirements.
We
may not be able to establish additional or replacement suppliers for certain
components or materials in a timely manner largely due to the complex nature
of
our and many of our suppliers’ manufacturing processes. Production issues,
including capacity constraint; quality issues affecting us or our suppliers;
an
inability to develop and validate alternative sources if required; or a
significant increase in the price of materials or components could adversely
affect our operations and financial condition.
There
are
no material unresolved written comments that were received from the SEC
staff
180 days or more before the end of our fiscal year relating to our periodic
or current reports under the Securities Exchange Act of 1934.
Our
world
headquarters are located in Natick, Massachusetts. We have regional headquarters
located in Tokyo, Japan and Paris, France. As of December 31, 2006,
our manufacturing, research, distribution and other key facilities totaled
more
than 8,242,344 million square feet, of which more than
5,838,787 million square feet was owned by us and the balance is leased. As
of December 31, 2006, our principal manufacturing and technology centers
were located in Massachusetts, Indiana, Minnesota, New Jersey, Florida,
California, New York, Utah, Washington, Puerto Rico, Ireland, Costa Rica
and
Japan, and our principal distribution centers were located in Massachusetts,
The
Netherlands and Japan. As of December 31, 2006, we maintained 37
manufacturing, distribution and technology centers, 25 in the U.S., one
in
Puerto Rico, five in Ireland, one in Costa Rica, two in The Netherlands
and two
in Japan. We also share a training facility in Brussels, Belgium with Abbott.
Many of these facilities produce and manufacture products for more than
one of
our divisions and include research facilities.
|
(in
square feet)
|
Total
Space
|
Owned
|
Leased
|
|||
|
Domestic
|
6,255,900
|
4,353,965
|
1,901,935
|
|||
|
Foreign
|
1,986,444
|
1,484,822
|
501,622
|
|||
|
Total
|
8,242,344
|
5,838,787
|
2,403,557
|
|||
See
Note J—Commitments
and Contingencies
to our
2006 consolidated financial statements included in Item 8 of this
Form 10-K.
None.
Our
common stock is traded on the New York Stock Exchange under the symbol
“BSX.”
Our annual CEO
certification for the previous year has been submitted to the NYSE.
The
following table shows the market range for our common stock for each
of the last
eight quarters based on reported sales prices on the New York Stock Exchange.
|
2006
|
High
|
Low
|
|||||
|
First
Quarter
|
$
|
26.48
|
$
|
20.90
|
|||
|
Second
Quarter
|
23.30
|
16.65
|
|||||
|
Third
Quarter
|
17.75
|
14.77
|
|||||
|
Fourth
Quarter
|
17.18
|
14.65
|
|||||
|
2005
|
|||||||
|
First
Quarter
|
$
|
35.19
|
$
|
28.67
|
|||
|
Second
Quarter
|
30.80
|
27.00
|
|||||
|
Third
Quarter
|
28.95
|
23.05
|
|||||
|
Fourth
Quarter
|
27.33
|
22.95
|
|||||
We
have
not paid a cash dividend during the past two years. We currently do not
intend
to pay dividends, and intend to retain all of our earnings to repay indebtedness
and invest in the continued growth of our business. We may consider declaring
and paying a dividend in the future; however, there can be no assurance
that we
will do so.
At
February 23, 2007, there were 13,832 record holders of our common stock.
The
closing price of our common stock on February 23, 2007 was $17.12.
There
were no shares repurchased under our share repurchase program in 2006.
There are
approximately 37 million shares available for repurchase under our share
repurchase program.
Stock
Performance Graph
The
graph
below compares the five-year total return to stockholders on our common
stock
with the return of the Standard & Poor’s 500 Stock Index and the Standard
& Poor’s Healthcare Equipment Index. The graph assumes $100 was invested in
our common stock and in each of the named indices on January 1, 2002, and
that
all dividends were reinvested.
(in
millions, except per share data)
|
Year
Ended December 31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Operating
Data
|
||||||||||||||||
|
Net
sales
|
$
|
7,821
|
$
|
6,283
|
$
|
5,624
|
$
|
3,476
|
$
|
2,919
|
||||||
|
Gross
profit
|
5,614
|
4,897
|
4,332
|
2,515
|
2,049
|
|||||||||||
|
Selling,
general and administrative expenses
|
2,675
|
1,814
|
1,742
|
1,171
|
1,002
|
|||||||||||
|
Research
and development expenses
|
1,008
|
680
|
569
|
452
|
343
|
|||||||||||
|
Royalty
expense
|
231
|
227
|
195
|
54
|
36
|
|||||||||||
|
Amortization
expense
|
530
|
152
|
112
|
89
|
72
|
|||||||||||
|
Litigation-related
charges (credits), net
|
780
|
75
|
15
|
(99
|
)
|
|||||||||||
|
Purchased
research and development
|
4,119
|
276
|
65
|
37
|
85
|
|||||||||||
|
Total
operating expenses
|
8,563
|
3,929
|
2,758
|
1,818
|
1,439
|
|||||||||||
|
Operating
(loss) income
|
(2,949
|
)
|
968
|
1,574
|
697
|
610
|
||||||||||
|
Loss
(income) before income taxes
|
(3,535
|
)
|
891
|
1,494
|
643
|
549
|
||||||||||
|
Net
(loss) income
|
(3,577
|
)
|
628
|
1,062
|
472
|
373
|
||||||||||
|
|
||||||||||||||||
|
Net
(loss) income per common share — basic
|
$
|
(2.81
|
)
|
$
|
0.76
|
$
|
1.27
|
$
|
0.57
|
$
|
0.46
|
|||||
|
Net
(loss) income per common share — assuming dilution
|
$
|
(2.81
|
)
|
$
|
0.75
|
$
|
1.24
|
$
|
0.56
|
$
|
0.45
|
|||||
|
|
||||||||||||||||
|
Weighted
average shares outstanding — assuming dilution
|
1,273.7
|
837.6
|
857.7
|
845.4
|
830.0
|
|||||||||||
|
As
of December 31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Balance
Sheet Data
|
||||||||||||||||
|
Cash,
cash equivalents and marketable securities
|
$
|
1,668
|
$
|
848
|
$
|
1,640
|
$
|
752
|
$
|
260
|
||||||
|
Working
capital
|
2,271
|
1,152
|
684
|
487
|
285
|
|||||||||||
|
Total
assets
|
31,096
|
8,196
|
8,170
|
5,699
|
4,450
|
|||||||||||
|
Borrowings
(long-term and short-term)
|
8,902
|
2,020
|
2,367
|
1,725
|
935
|
|||||||||||
|
Stockholders’
equity
|
15,298
|
4,282
|
4,025
|
2,862
|
2,467
|
|||||||||||
|
Book
value per common share
|
$
|
10.37
|
$
|
5.22
|
$
|
4.82
|
$
|
3.46
|
$
|
3.00
|
||||||
On
April
21, 2006, we consummated our acquisition of Guidant. We consolidated
Guidant’s operating results with those of Boston Scientific beginning on the
date of acquisition. See Note D - Business Combinations for
further details regarding the transaction.
We
paid a
two-for-one stock split that was effected in the form of a 100 percent
stock
dividend on November 5, 2003. We have restated all historical amounts above
to
reflect the stock split.
See
also
the notes to our consolidated financial statements included in Item 8 below.
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. This mission is accomplished
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 strategic acquisitions and alliances. Our quality
policy,
applicable to all employees, is “I improve the quality of patient care and all
things Boston Scientific.”
Our
management’s discussion and analysis (MD&A) begins with an overview of the
Guidant acquisition, which represents a transforming event for Boston
Scientific. It then provides an executive summary that outlines our financial
highlights during 2006 and identifies some key trends that impacted operating
results during the year. We supplement this summary with an in-depth look
at the
major issues we believe are most relevant to our current and future prospects.
Next is an examination of the material changes in our operating results for
2006
as compared to 2005 and our operating results for 2005 as compared to 2004.
The
discussion then provides an examination of liquidity, focusing primarily
on
material changes in our operating, investing and financing cash flows, as
depicted in our consolidated statements of cash flows, and the trends underlying
these changes. Finally, the MD&A provides information on our critical
accounting policies.
Guidant
Acquisition and Abbott Transaction
On
April
21, 2006, we consummated our acquisition of Guidant Corporation for an aggregate
purchase price of $28.4 billion, which represented a combination of cash,
common
stock and fully vested stock options.
The
purchase price net of cash acquired was approximately $21.7 billion. In
conjunction with the acquisition, we acquired approximately $6.7 billion
of
cash, including $4.1 billion in connection with Guidant’s prior sale of its
vascular intervention and endovascular solutions businesses to Abbott
Laboratories. With this acquisition, we have
become a
major provider in the more than $9 billion global Cardiac Rhythm Management
(CRM) business, enhancing our overall competitive position and long-term
growth
potential and further diversifying our product portfolio. The acquisition
has
established us as one of the world’s largest cardiovascular device companies and
a global leader in microelectronic therapeutics.
Guidant
makes a variety of implantable devices that can monitor the heart and deliver
electricity to treat cardiac abnormalities, including tachycardia, heart
failure
and bradycardia. These devices include implantable
cardioverter defibrillator
systems (ICDs) and pacemaker systems. In addition, Guidant also makes cardiac
surgery systems to perform cardiac surgical ablation, endoscopic vessel
harvesting and clampless beating-heart bypass surgery.
Prior
to
our acquisition of Guidant, Abbott acquired Guidant’s vascular intervention and
endovascular solutions businesses and agreed to share the drug-eluting
technology it acquired from Guidant with Boston Scientific. This agreement
gives
us access to a second drug-eluting stent program, which will complement our
existing TAXUS® stent
system program. See
Note
D
-
Business Combinations
to our
2006
consolidated financial statements included in Item 8 of this Form 10-K
for further details on the transaction.
We
consolidated Guidant’s operating results with those of Boston Scientific
beginning on the date of the acquisition, April 21, 2006. Since we have not
restated our results retroactively to reflect the historical financial position
or results of operations of Guidant, fluctuations in our operating results
for
2006 are due primarily to the acquisition of Guidant. However, we have included
supplemental pro forma financial information in
Note D - Business Combinations
to our
2006 consolidated financial statements included in Item 8 of this
Form 10-K to give effect to the acquisition as though it had occurred at
the beginning of 2006 and 2005.
Executive
Summary
Our
net
sales in 2006 increased to $7.821 billion from $6.283 billion in 2005.
Our reported net loss for 2006 was $3.577 billion, or $2.81 per diluted
share, on approximately 1.274 billion weighted average shares outstanding
as
compared to net income of $628 million, or $0.75 per diluted share, on
approximately 838 million weighted average shares outstanding in 2005. Our
reported results included net after-tax charges primarily related to the
acquisition of Guidant of $4.537 billion, or $3.55 per diluted share, in
2006 as compared to net after-tax charges of $894 million, or $1.07 per
diluted share, in 2005.1 In
addition, our cash provided by operating activities was $1.845 billion in
2006 as compared to $903 million in 2005.
The
growth in net sales resulted largely from our acquisition of Guidant, which
accounted for sales of $1.503 billion. The geographic mix of Guidant sales
included $1.025 billion of U.S. and $478 million of international sales.
The
business mix of Guidant sales consisted of $1.371 billion of CRM net sales
and
$132 million of Cardiac Surgery net sales. Our CRM net sales were comprised
of
$988 million of ICDs and $383 million of pacemaker systems. On a pro forma
basis, assuming a full year of results, CRM sales were $2.026 billion in
2006 as
compared to $2.28 billion in 2005. The decline, on a pro forma basis, was
a
result of lower average market shares for the Guidant devices in 2006 relative
to 2005. We believe the lower market share, as well as reduced market growth
rates, was due primarily to previous field actions in the industry. However,
during the fourth quarter
of 2006, we experienced a 10 percent sequential increase in net sales from
our
CRM business and a 13 percent increase for U.S. ICD sales, which we believe
is a
sign that our market share has increased and the CRM market is stabilizing
and will return to growth. We
remain
focused on our share recovery.
The
increase in our sales as a result of the acquisition of Guidant was partially
offset by a decrease in TAXUS stent system sales to $2.358 billion in 2006
from
$2.556 billion in 2005. The geographic mix of TAXUS stent system sales in
2006
included $1.561 billion of U.S. and $797 million of international sales.
In
2005, we had $1.763 billion of U.S. and $793 million of international sales.
The
decline in TAXUS sales during 2006 was attributable
to a decrease in the U.S. market size due to recent uncertainty regarding
the
risk of late stent thrombosis following the use of drug-eluting stents and
a
decline in
_________________________
1
The 2006 net after-tax charges consisted of: $4.477 billion in expenses
resulting from purchase accounting associated primarily with purchased research
and development obtained as part of the Guidant acquisition and the step-up
value of acquired Guidant inventory sold; $143 million in acquisition-related
costs, including the fair value adjustment related to the sharing of proceeds
feature of the Abbott stock purchase, a CRM technology offering charge and
other
business integration costs; a $31 million credit resulting primarily from
the
reversal of accrued contingent payments due to the cancellation of the abdominal
aortic aneurysm (AAA) program that we obtained as part of the TriVascular,
Inc.
acquisition; $81 million in write-downs attributable to our investment
portfolio; and a $133 million one-time tax benefit for the reversal of tax
accruals previously established for offshore unremitted earnings. The 2005
net
after-tax charges consisted of a $598 million litigation settlement with
Medinol
Ltd. and $267 million in purchased research and development attributable
primarily to our 2005 acquisitions.
average
market shares in 2006 relative to 2005. Late stent thrombosis is the formation
of a clot, or thrombus, within the stented area one year or more after
implantation of the stent. Exiting 2005, the percentage of drug-eluting stents
used in U.S. interventional procedures were in the high 80 percent range,
as
compared to U.S. drug-eluting stent market penetration rates in the low 70
percent range exiting 2006. Our U.S. drug-eluting stent market share
declined throughout the first three quarters of 2005, but has been stable
during
2006 and we have maintained our market leadership position. We
expect
to launch our TAXUS Express2™
stent
system in the Japan market, which we believe exceeds $500 million, in the
second
half of 2007 and our TAXUS Liberté™ stent
system in
the U.S., subject to regulatory approvals.
During
2006, our worldwide Endosurgery group sales increased to $1.346 billion
from $1.228 billion in 2005, an increase of 10 percent. Further, our
Neuromodulation division, formed following the June 2004 acquisition of
Advanced Bionics Corporation, generated $234 million in net sales during
2006 as compared to $148 million in 2005, an increase of 58
percent.
Our
gross
profit, as a percentage of net sales, declined from 77.9 percent in 2005
to 71.8
percent in 2006 largely as a result of certain one-time purchase accounting
adjustments associated with the Guidant acquisition. In addition, our gross
profit declined by approximately 2.0 percentage points due to period expenses,
including costs associated with Project Horizon, a corporate-wide
cross-functional initiative to improve and harmonize our overall quality
processes and systems. Our gross profit also declined by 0.8 percentage points
due to shifts in our product sales mix toward lower margin products, including
CRM products and lower sales of TAXUS stents in the U.S.
Our
operating expenses, excluding purchased research and development and
litigation-related charges, increased $1.571 billion to $4.444 billion in
2006
from $2.873 billion in 2005. Of this increase, $1.299 billion related to
operating expenses associated with the Guidant business. In the second half
of
2006, we maintained existing spending levels given our expectation that the
CRM
market and the drug-eluting stent market will recover over time and this
infrastructure will be necessary to support future growth. In addition, we
announced our plan to reallocate certain CRM resources, including those in
the
research and development and sales and marketing functions; to
increase innovation, productivity and competitiveness; and to enhance
our ability to deliver new products to physicians and their patients.
This
plan
resulted
in a reduction of our CRM workforce by approximately 500 to 600 employees
during the first quarter of 2007. We intend to reinvest the bulk of the savings
from the plan back into the CRM business to create a strong, competitive
pipeline that will help grow revenue that, combined with expense controls,
should lead to increased profitability. The reinvestment will include additional
hiring within the research and development function where there were shortages
of desired skills.
We
continue to be focused on examining our operations in order to identify cost
improvement measures and reallocate resources to support growth
initiatives.
At
December 31, 2006, we had total outstanding debt of $8.902 billion, related
primarily to the Guidant acquisition, cash of $1.668 billion and working
capital
of $2.271 billion. We continued to generate strong operating cash flow during
2006. We
expect
to use a portion of our operating cash flow to reduce our outstanding debt
obligations over the next several years; our
first
upcoming debt maturity is in April 2008 for $650 million.
FDA
Warning Letters
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 (PMA)
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. During 2005, in order
to
strengthen our corporate-wide quality controls, we launched Project
Horizon,
a
corporate-wide cross-functional initiative to improve and harmonize our overall
quality processes and systems. As part of Project Horizon, we have
made modifications
to our process validation and complaint management systems. Project
Horizon has resulted in the reallocation of significant internal
engineering and management resources to quality initiatives, as well as
incremental spending. It also has resulted in adjustments to product launch
schedules of certain products and the decision to discontinue certain other
product lines over time.
In
2006,
our Board of Directors created a Compliance and Quality Committee to monitor
our
compliance and quality initiatives. We believe we have identified solutions
to
the quality issues cited by the FDA, and we continue to make progress in
transitioning our organization to implement those solutions. We communicate
frequently and meet regularly with the FDA to apprise them of our progress.
The
FDA has communicated the need for us to complete substantially all remediation
efforts before they will reinspect our facilities. We have 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 believe we will be ready
for the
third-party audit in the second quarter of 2007.
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. This
FDA
warning letter followed an inspection by the FDA that was completed on
September 1, 2005 and cited a number of observations. Guidant received a
follow-up letter from the FDA dated January 5, 2006. As stated in this
follow-up letter, until we have corrected the identified deficiencies, the
FDA
may not grant requests for exportation certificates to foreign governments
or
approve PMA applications for class III devices to which the deficiencies
described are reasonably related. The FDA conducted a further inspection
of the
CRM facility between December 15, 2005 and February 9, 2006 and made
one additional inspectional observation. The
FDA
has concluded its reinspection of our CRM facilities. While we believe this
reinspection went well, we may be required to take additional actions in
order
to comply with any FDA observations that we may receive.
Outlook
Guidant
Acquisition
On
April
21, 2006, we consummated our acquisition of Guidant. With this
acquisition, we have become a major provider in the more than $9 billion
global
CRM business, enhancing our overall competitive position and long-term growth
potential and further diversifying our product portfolio. The acquisition
has
established us as one of the world’s largest cardiovascular device companies and
a global leader in microelectronic therapeutics.
The
integration of Guidant’s operations and product lines with Boston Scientific’s
is complex and time-consuming, and the separation of the Guidant businesses
required by the Abbott transaction adds complexity to the transition process.
We
have entered transition services agreements with Abbott, under which Abbott
and
Boston Scientific provide or make available to each other certain services,
rights, properties and assets for a temporary period. Many of these transition
services agreements expire during 2007. The failure to integrate Boston
Scientific and Guidant successfully and to manage the challenges presented
by
the transition process effectively, including the retention of key Guidant
personnel and the
timely
execution of activities under the transition services agreement, may reduce
the
anticipated potential benefits of the acquisition.
During
2007, we will continue to incur integration and restructuring costs as we
integrate certain operations of Guidant. In
January 2007, we announced our plan to reallocate certain CRM resources,
including those in research and development as well as sales and marketing
functions, to
increase innovation, productivity and competitiveness, and to enhance
our ability to deliver new products to physicians and their patients.
This
plan
resulted
in a reduction of our CRM workforce by approximately 500 to 600 employees
during the first quarter of 2007. There can be no assurances that we will
realize efficiencies related to the integration of the businesses sufficient
to
offset incremental transaction, acquisition-related, integration and
restructuring costs over time.
Net
sales
from our CRM and Cardiac Surgery businesses were $1.503 billion for 2006,
including $1.371 billion of CRM sales and $132 million of Cardiac Surgery
sales.
On a pro forma basis, assuming a full year of results, CRM sales were $2.026
billion in 2006 as compared to $2.28 billion in 2005. The
decline, on a pro forma basis, was a result of lower average market shares
for
the Guidant devices in 2006 relative to 2005. We believe the lower market
share,
as well as reduced market growth rates, was due primarily to previous field
actions in the industry. These
field actions included Guidant’s decision announced on June 24, 2005 to
stop selling Guidant’s leading defibrillator systems temporarily, which were
returned to the market beginning on August 2, 2005. In addition, on June
26, 2006, we announced that we were retrieving a specific subset of pacemakers,
cardiac resynchronization therapy pacemakers and ICDs due to a supplier’s
low-voltage capacitor not performing consistently. We believe that these
field
actions contributed to our CRM division having a lower market share for ICDs
and
pacemaker systems for 2006 as compared to 2005.
The
worldwide CRM market growth rates, including the U.S. defibrillator market,
declined during the first three quarters of 2006; these growth levels are
below
those experienced in recent years. The U.S. defibrillator market represents
approximately half of the worldwide CRM market. During the fourth quarter
of
2006, we experienced a 10 percent sequential increase in net sales from our
CRM
business and a 13 percent increase for U.S. ICD sales, which we believe is
a
sign that our market share has increased and the CRM market is stabilizing
and will return to growth. We expect that growth rates in the worldwide CRM
market, and the U.S. ICD market, will recover over several years. However,
there
can be no assurance that these markets will return to their historical
growth rates or that we will be able to regain CRM market share or 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 this market
include:
-
future product recalls or new physician advisories by us or our competitors;
-
our ability to resolve the issues identified in the CRM warning letter to the satisfaction of the FDA;
-
variations in clinical results, reliability or product performance of our and our competitors’ products;
-
our ability to retain our sales force and other key personnel;
-
our ability to reestablish the trust and confidence of the implanting community, the referring community and prospective patients in our technology;
-
delayed or limited regulatory approvals;
40
-
our ability to launch next-generation products and technology features in a timely manner, if at all;
-
international economic and regulatory conditions;
-
new competitive launches;
-
unfavorable reimbursement policies;
-
declines in average selling prices;
-
the overall number of procedures performed; and
-
the outcome of legal proceedings related to our CRM business.
We
remain
focused on our market share recovery and intend to accelerate recovery by
regaining
the trust and confidence of the implanting community, the referring community
and prospective patients; continuing to improve our quality systems; investing
in new technologies and clinical trials; retaining our sales force and other
key
personnel; continuing research and development productivity; and improving
physician and patient communication. However, if these efforts are not
successful, and the CRM market does not recover according to our expectations,
or we are unable to regain market share and net sales on a timely basis,
our
business, financial condition and results of operations could be materially
adversely affected.
Coronary
Stent Business
Coronary
stent revenue represented approximately 32 percent of our consolidated net
sales
for 2006, as compared to 43 percent in 2005, primarily as a result of the
Guidant acquisition. We estimate that the worldwide coronary stent market
approximated $6 billion in 2006, and estimate that drug-eluting stents
represented approximately 90 percent of the dollar value of the worldwide
coronary stent market in 2006. The U.S. drug-eluting stent market for 2006
approximated $3 billion. Our U.S. TAXUS sales declined to
$1.561
billion for 2006 as compared to $1.763 billion for 2005.
Recent
uncertainty regarding the risk of late stent thrombosis following the use
of
drug-eluting stents contributed to a decline in the U.S. stent market size.
In
addition to the decline in U.S. drug-eluting stent market penetration, device
utilization per procedure and overall percutaneous coronary intervention
volume
has decreased likely due to market conservatism. We believe this conservatism
is
a temporary circumstance that, if alleviated, may lead to an increase in
future
procedural volume and usage of drug-eluting stents. In the fourth quarter
of
2006, the FDA held a special advisory
panel meeting to discuss drug-eluting stents. Members of the panel concluded
that drug-eluting stents remain safe and effective when used as indicated,
and
that the benefits outweigh the risks. We
believe that percutaneous coronary interventions, device utilization per
procedure and drug-eluting stent penetration rates will increase in the future,
and result in a market recovery; however, there can be no assurance that
this
will happen or that the market will recover to previous levels. We expect
that
our U.S. drug-eluting stent sales in 2007 may be below those experienced
in
2006.
During
2006, our international TAXUS stent system net sales remained consistent
with
2005. Drug-eluting
stent penetration rates increased during
the first half of 2006, and remained relatively flat throughout the second
half
of 2006 and exiting 2006, the effect of which offset
declines in our market share associated with several competitive launches
of new
drug-eluting stent products in our Europe and Inter-Continental markets.
We
expect competitive launches in these geographies to continue to put pressure
on
our market share and average selling prices in 2007. In addition, we expect
that
drug-eluting stent penetration rates will remain relatively consistent in
our
Europe and Inter-Continental markets during 2007 due primarily to concerns
regarding the risk of late stent thrombosis. Subject to regulatory
approval,
we expect to launch our TAXUS Express
2
stent
system in Japan during the second half of 2007, where we estimate a drug-eluting
stent market size exceeding $500 million.
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.
However,
we believe that we can maintain a leadership position within the drug-eluting
stent markets in which we compete for a variety of reasons,
including:
-
the results of our TAXUS clinical trials;
-
the performance benefits of our current technology;
-
the strength of our pipeline of drug-eluting stent products and the planned launch sequence of these products;
-
our overall market leadership in interventional medicine and our sizeable interventional cardiology sales force;
-
our significant investments in our sales, clinical, marketing and manufacturing capabilities; and
-
our second drug-eluting stent platform obtained as a result of our Guidant acquisition.
However,
a material decline in our drug-eluting stent
revenue would have a significant adverse impact on our future operating
results.
The most significant variables that may impact the size of the drug-eluting
coronary stent market and our position within this market
include:
-
continued concerns regarding the risk of late stent thrombosis;
-
the entry of additional competitors in international markets and the U.S.;
-
continued physician and patient confidence in our technology and attitudes toward drug-eluting stents;
-
our ability to resolve the issues identified in the current legacy Boston Scientific corporate warning letter to the satisfaction of the FDA;
-
declines in the average selling prices of drug-eluting stent systems;
-
variations in clinical results or product performance of our and our competitors’ products;
-
delayed or limited regulatory approvals;
-
the overall number of procedures performed;
-
unfavorable reimbursement policies;
42
-
intellectual property litigation;
-
the average number of stents used per procedure;
-
our ability to maintain and expand indications for use;
-
our ability to launch next-generation products and technology features;
-
the international adoption rate of drug-eluting stent technology;
-
international economic and regulatory conditions; and
-
the level of supply of our drug-eluting stent systems and competitive stent systems.
The
TAXUS
drug-eluting stent system is currently one of only two drug-eluting products
in
the U.S. market. Our share of the drug-eluting stent market, as well as unit
prices, may be adversely impacted as additional significant competitors enter
the drug-eluting stent market, which could occur as early as the second half
of
2007 in the U.S.
Prior
to
our acquisition of Guidant, Abbott acquired Guidant’s vascular intervention and
endovascular solutions businesses and agreed to share the drug-eluting
technology it acquired from Guidant with Boston Scientific, including the
XIENCE™ V everolimus-eluting coronary stent system. In October of 2006, we
received CE mark approval to begin marketing the PROMUS™
stent
system, which is a private-labeled XIENCE V drug-eluting coronary stent system
supplied to us by Abbott. During the fourth quarter of 2006, we initiated
a
limited launch of the PROMUS stent system in certain European countries.
We
expect to launch the PROMUS stent system in certain Inter-Continental countries
in the second quarter of 2007 and in the U.S. in 2008, subject to regulatory
approval. Under the terms of our supply arrangement with Abbott, the profit
margin of a PROMUS stent system will be significantly lower than our TAXUS
drug-eluting stent. Therefore, the mix of PROMUS stent system revenue relative
to our total drug-eluting stent revenue could have a negative impact on our
overall profitability as a percentage of revenue. In addition, we will incur
incremental costs and expend incremental resources in order to develop and
commercialize products utilizing the Guidant drug-eluting stent system
technology and to support the launch of our internally manufactured
everolimus-eluting stent system in the future, which we expect will have
profit
margins more comparable to our TAXUS stent system.
Regulatory
Compliance
In
January 2006, legacy Boston Scientific received a corporate warning letter
from
the FDA, notifying us of serious regulatory problems at three facilities.
During 2005, in order to strengthen our corporate-wide quality controls,
we
launched Project Horizon, which has resulted in the reallocation of significant
internal engineering and management resources to quality initiatives, as
well as incremental spending. It also has resulted in adjustments to product
launch schedules of certain products and the decision to discontinue certain
other product lines over time. See the
FDA
Warning Letters
section
above for further information regarding the FDA warning letters.
There
can
be no assurances regarding the length of time or cost it will take us to
resolve
these issues to the satisfaction of the FDA. Our inability to resolve these
issues in a timely manner may further delay product launch schedules, including
the U.S. launch of our TAXUS Liberté stent, which may weaken our competitive
position in the markets in which we participate. If our remedial actions
are not
satisfactory to the FDA, we may have to devote additional financial and human
resources to our efforts, and the FDA may take further regulatory actions
against us, including, but not limited to, seizing our product inventory,
obtaining
a court injunction against further marketing of our products, issuing a consent
decree or assessing civil monetary penalties.
Intellectual
Property Litigation
There
continues to be significant intellectual property litigation in the coronary
stent market. We are currently involved in a number of legal proceedings
with
our existing competitors, including Johnson & Johnson and Medtronic, Inc.
There can be no assurance that an adverse outcome in one or more of these
proceedings would not impact our ability to meet our objectives in the market.
See Note
J - Commitments and Contingencies to
our
2006 consolidated financial statements included in Item 8 of this
Form 10-K
for a
description of these legal proceedings.
Innovation
Our
approach to innovation combines internally developed products and technologies
with those we obtain externally through our strategic acquisitions and
alliances. Our research and development program is largely focused on the
development of next-generation and novel technology offerings across multiple
programs and divisions. As
a
result of our agreement with Abbott, we now have access to a second drug-eluting
stent program, which will complement our existing TAXUS stent
system program. We
expect
to continue to invest in our paclitaxel drug-eluting stent program, along
with
our internally manufactured everolimus-eluting stent program, to continue
to
sustain our worldwide drug-eluting stent market leadership position. During
2007, we expect to incur incremental capital expenditures and research and
development expenses as a result of our dual drug-eluting stent program.
We
successfully launched our next-generation drug-eluting stent product, the
TAXUS
Liberté stent system, during 2005 in our Europe and Inter-Continental markets.
We expect to launch our TAXUS Liberté stent system in the U.S., subject to
regulatory approval. In addition, we expect to continue to invest in our
CRM
technologies, including our LATITUDE®
Patient
Management System, which
is
technology that enables physicians to monitor device performance remotely
while
patients remain in their homes, and
the
Frontier™ CRM
technology, our
next-generation pulse generator platform.
In
October 2006, the FDA approved expansion of our LATITUDE System to be used
for
remote monitoring in certain existing ICDs and cardiac resynchronization
defibrillators.
We also
expect to invest selectively in areas outside of drug-eluting stent and CRM
technologies. There can be no assurance that these technologies will achieve
technological feasibility, obtain regulatory approval or gain market acceptance.
A delay in the development or approval of these technologies may adversely
impact our future growth.
Our
acquisitions and alliances are intended to expand further our ability to
offer
our customers effective, high-quality medical devices that satisfy their
interventional needs. Management believes it has developed a sound plan to
integrate acquired businesses. However, our failure to integrate these
businesses successfully could impair our ability to realize the strategic
and
financial objectives of these transactions. Potential future acquisitions,
including companies with whom we currently have strategic alliances or options
to purchase, or the fulfillment of our contingent consideration obligations
may
be dilutive to our earnings and may require additional debt or equity financing,
depending on their size and nature. Further, in connection with these
acquisitions and other strategic alliances, we have acquired numerous in-process
research and development projects. As we continue to undertake strategic
growth
initiatives, it is reasonable to assume that we will acquire additional
in-process research and development projects.
In
addition, we have entered a significant number of strategic alliances with
privately held and publicly traded companies. Many of these alliances involve
equity investments and often give us the option to acquire the other company
or
assets of the other company in the future. We enter these strategic alliances
to
broaden our product technology portfolio and to strengthen and expand our
reach
into existing and new markets. The success of these alliances is an element
of
our growth strategy and we will continue to seek
market
opportunities and growth through selective strategic alliances and
acquisitions. However, the full benefit of these alliances is often
dependent on the strength of the other companies’ underlying technology and
ability to execute. An inability to achieve regulatory approvals and launch
competitive product offerings, or litigation related to these technologies,
among other factors, may prevent us from realizing the benefit of these
alliances.
Even
though we believe that the drug-eluting stent market and CRM market will
recover
above existing levels, there can be no assurance to the timing or extent
of this
recovery. In 2007, we will continue to reprioritize our internal research
and
development project portfolio and our external investment portfolio
primarily based on expectations of future market growth. This reprioritization
may result in our decision to sell, discontinue, write-down, or otherwise
reduce the funding of certain projects, operations, investments or assets.
Any proceeds from sales, or any increases in operating cash flows, resulting
from such management actions may be used to reduce debt or may be reinvested
in
other research and development projects or other operational
initiatives.
Reimbursement
and Funding
Our
products are purchased by hospitals, doctors and other healthcare providers
who
are reimbursed by third-party payors, such as governmental programs (e.g.,
Medicare and Medicaid), private insurance plans and managed-care programs,
for
the healthcare services provided to their patients. Third-party payors may
provide or deny coverage for certain technologies and associated procedures
based on assessment criteria as determined by the third-party payor.
Reimbursement by third-party payors for these services is based on a wide
range
of methodologies that may reflect the services’ assessed resource costs,
clinical outcomes and economic value. These reimbursement methodologies confer
different, and often conflicting, levels of financial risk and incentives
to
healthcare providers and patients, and these methodologies are subject to
frequent refinements. There is no way of predicting the outcome
of reimbursement decisions, or their impact on our operating results.
Third-party payors are also increasingly adjusting reimbursement rates and
challenging the prices charged for medical products and services. There can
be
no assurance that our products will be automatically covered by third-party
payors, that reimbursement will be available or, if available, that the
third-party payors’ coverage policies will not adversely affect our ability to
sell our products profitably.
International
Markets
International
markets are also being affected by economic pressure to contain reimbursement
levels and healthcare costs. Our sales growth and profitability from our
international operations may be limited by risks and uncertainties related
to
economic conditions in these regions, currency fluctuations, regulatory and
reimbursement approvals, competitive offerings, infrastructure development,
rights to intellectual property and our ability to implement our overall
business strategy. Any significant changes in the competitive, political,
regulatory, reimbursement or economic environment where we conduct international
operations may have a material impact on our business, financial condition
or
results of operations.
In
addition, we are required to receive or renew regulatory approvals and obtain
exportation certificates to foreign governments in order to market our products
in certain international jurisdictions. These approvals and certificates
could
be impacted by the FDA warning letters we have received. If these approvals
and
certificates are not renewed or obtained on a timely basis, our ability to
market our full line of existing products within these jurisdictions may
be
limited, which could have a material adverse impact on our
business.
Results
of Operations
Net
Sales
The
following table provides our net sales by region and the relative change
on an
as reported and constant currency basis:
|
2006
versus 2005
|
2005
versus 2004
|
|||||||||||||||||||||
|
(in
millions)
|
2006
|
2005
|
2004
|
As
Reported
Currency
Basis
|
Constant
Currency
Basis
|
As
Reported
Currency
Basis
|
Constant
Currency
Basis
|
|||||||||||||||
|
United
States
|
$
|
4,840
|
$
|
3,852
|
$
|
3,502
|
26
|
%
|
26
|
%
|
10
|
%
|
10
|
%
|
||||||||
|
Europe
|
1,574
|
1,161
|
994
|
36
|
%
|
34
|
%
|
17
|
%
|
17
|
%
|
|||||||||||
|
Japan
|
594
|
579
|
613
|
3
|
%
|
8
|
%
|
(6
|
%)
|
(4
|
%)
|
|||||||||||
|
Inter-Continental
|
813
|
691
|
515
|
18
|
%
|
16
|
%
|
34
|
%
|
28
|
%
|
|||||||||||
|
International
|
2,981
|
2,431
|
2,122
|
23
|
%
|
22
|
%
|
15
|
%
|
13
|
%
|
|||||||||||
|
Worldwide
|
$
|
7,821
|
$
|
6,283
|
$
|
5,624
|
24
|
%
|
24
|
%
|
12
|
%
|
11
|
%
|
||||||||
The
following table provides our worldwide net sales by division and the relative
change on an as reported basis:
|
(in
millions)
|
2006
|
2005
|
2004
|
2006
versus 2005
|
2005
versus 2004
|
|||||||||||
|
Interventional
Cardiology
|
$
|
3,612
|
$
|
3,783
|
$
|
3,451
|
(5
|
%)
|
10
|
%
|
||||||
|
Peripheral
Interventions/ Vascular Surgery
|
666
|
715
|
656
|
(7
|
%)
|
9
|
%
|
|||||||||
|
Electrophysiology
|
134
|
132
|
130
|
2
|
%
|
2
|
%
|
|||||||||
|
Neurovascular
|
326
|
277
|
253
|
18
|
%
|
9
|
%
|
|||||||||
|
Cardiac
Surgery
|
132
|
N/A
|
N/A
|
N/A
|
N/A
|
|||||||||||
|
Cardiac
Rhythm Management
|
1,371
|
N/A
|
N/A
|
N/A
|
N/A
|
|||||||||||
|
Cardiovascular
|
6,241
|
4,907
|
4,490
|
27
|
%
|
9
|
%
|
|||||||||
|
Oncology
|
221
|
207
|
186
|
7
|
%
|
11
|
%
|
|||||||||
|
Endoscopy
|
754
|
697
|
641
|
8
|
%
|
9
|
%
|
|||||||||
|
Urology
|
371
|
324
|
261
|
15
|
%
|
24
|
%
|
|||||||||
|
Endosurgery
|
1,346
|
1,228
|
1,088
|
10
|
%
|
13
|
%
|
|||||||||
|
Neuromodulation
|
234
|
148
|
46
|
58
|
%
|
222
|
%
|
|||||||||
|
Worldwide
|
$
|
7,821
|
$
|
6,283
|
$
|
5,624
|
24
|
%
|
12
|
%
|
||||||
We
manage
our international operating regions and divisions on a constant currency
basis,
while market risk from currency exchange rate changes is managed at the
corporate level. The relative change on a constant currency basis by division
approximated the change on an as reported basis. To calculate regional and
divisional 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.
U.S.
Net Sales
In
2006,
our U.S. net sales increased by $988 million, or 26 percent, as compared to
2005. The increase is related primarily to the inclusion of $1.025 billion
of
U.S. net sales from our new CRM and Cardiac Surgery divisions. In addition,
we
experienced increases in our U.S. net sales related to sales growth of
$83 million from our Endosurgery group and $75 million from our
Neuromodulation division. Offsetting this increase were declines in our U.S.
net
sales of TAXUS coronary stent systems to $1.561 billion for 2006 as compared
to
$1.763 billion for 2005 and sales decreases of approximately $70 million
in 2006
as compared to 2005 due to the expiration during the first quarter of 2006
of
our agreement to distribute certain third-party guidewire and sheath products.
The decline in TAXUS sales was due principally to a decrease in the U.S.
drug-eluting stent market size and a decline in average TAXUS market share
in
2006 relative to 2005. The drug-eluting stent market decline was due to recent
uncertainty regarding the risk of late stent thrombosis following the use
of
drug-eluting stents, which resulted in conservative usage by physicians.
The
overall size of the U.S. drug-eluting stent market is driven primarily by
the
number of percutaneous coronary interventional procedures performed; the
number
of devices used per procedure; the drug-eluting stent penetration rate or
mix
between bare metal and drug-eluting stents across procedures; and average
drug-eluting stent selling prices. The primary reason for the decline in
the
U.S. drug-eluting stent market size was lower penetration rates in 2006 relative
to 2005. Exiting
2005, the percentage of drug-eluting stents used in U.S. interventional
procedures were in the high 80 percent range, as compared to U.S. drug-eluting
stent market penetration rates in the low 70 percent range exiting
2006. The drug-eluting stent market also declined due to decreases in the
number of devices used per procedure and slight reductions
in average selling prices. Our
drug-eluting stent market share declined throughout the first three quarters
of
2005, but has been stable during 2006. See
the
Outlook
section
for a more detailed discussion of the drug-eluting stent market and our position
within that market.
In
2005,
our U.S. net sales increased by $350 million, or 10 percent, as compared to
2004. The increase resulted largely from a full year of TAXUS stent system
sales, which we launched in March 2004. U.S. TAXUS stent system sales for
2005
were $1.763 billion as compared to $1.57 billion for 2004, offset by a reduction
in market share compared to the prior year. The remainder of the increase
in our
U.S. net sales related to sales growth of $83 million from our Endosurgery
group and $75 million from our Neuromodulation division.
International
Net Sales
In
2006,
our international net sales increased by $550 million, or 23 percent,
as compared to 2005. The increase related primarily to the inclusion of $478
million of international net sales from our new CRM and Cardiac Surgery
divisions. The remainder of the increase in our revenue in these markets
was due
to growth in various product franchises, including $35 million in net sales
from
our Endosurgery group and $27 million in sales growth from our Neurovascular
division. TAXUS stent system sales in our Europe and Inter-Continental markets
were $797 million in 2006 as compared to $793 million in 2005. TAXUS stent
system sales were favorably impacted by drug-eluting stent penetration rates
in
these markets. The drug-eluting stent penetration rates increased during
the
first half of 2006, and remained relatively flat throughout the second half
of
2006 and exiting 2006. Market share declines associated with several competitors
having launched new drug-eluting stent products in these markets offset the
favorable impact of increased penetration rates.
In
2006,
our legacy Boston Scientific net sales in Japan, excluding the impact of
currency fluctuations, were relatively consistent with the prior year. Due
to
the timing of regulatory approval for our TAXUS stent system and
government-mandated pricing reductions for other products, we do not expect
significant revenue growth in our legacy Japan business until we launch our
TAXUS Express2
stent
system in Japan,
which
we
expect to occur during the second half of 2007. Japan net sales for 2006
included $62 million from CRM and Cardiac Surgery products.
In
2005,
our international net sales increased by $309 million, or 15 percent,
as compared to 2004. The increase related primarily to sales growth of our
TAXUS
stent system by $220 million, or 38 percent, in our Europe and
Inter-Continental markets. This increase in TAXUS stent system sales in these
markets was primarily the result of increased market penetration rates, as
well
as the successful launch of our TAXUS Liberté stent system during 2005. The
remainder of the increase in our revenue in these markets was due to growth
in
various product franchises, including $57 million in incremental sales from
our Endosurgery group and $27 million in sales growth from our
Neuromodulation division.
Gross
Profit
The
following table provides a summary of our gross profit:
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
(in
millions)
|
$
|
%
of Net Sales
|
$
|
%
of Net Sales
|
$
|
%
of Net Sales
|
|||||||||||||
|
Gross
profit
|
5,614
|
71.8
|
4,897
|
77.9
|
4,332
|
77.0
|
|||||||||||||
In
2006,
our gross profit, as a percentage of net sales, decreased by 6.1 percentage
points as compared to 2005. Our gross profit for 2006 decreased as a percentage
of net sales by 3.8 percentage points as compared to 2005 due to costs
associated with Guidant, including $267 million in step-up value of
acquired Guidant inventory sold during the period and a $31 million charge
associated with making our LATITUDE Patient Management System available to
many
of our existing CRM patients without additional charge. In connection with
the
accounting for the Guidant acquisition, we wrote up inventory acquired from
manufacturing cost to fair value. As of December 31, 2006, we had no inventory
step-up value remaining in inventory. In addition, our gross profit for 2006
decreased as a percentage of net sales by approximately 2.0 percentage points
as
compared to 2005 due to period expenses, including costs associated with
Project
Horizon and certain inventory charges. Shifts in our product sales mix toward
lower margin products, including CRM products and lower sales of TAXUS stents
in
the U.S., decreased our gross profit as a percentage of net sales by 0.8
percentage points. These decreases were offset by a 0.8 percentage point
increase due to the favorable change in currency exchange rates on our gross
profit.
In
2005,
our gross profit, as a percentage of net sales, increased by 0.9 percentage
points as compared to 2004. Our 2004 gross profit decreased by approximately
1.0
percentage points due to $57 million in inventory write-downs, including a
$43 million write-down attributable to recalls of certain of our coronary
stent systems and a $14 million write-down of TAXUS stent inventory due to
shelf-life dating. In addition, shifts in our product sales mix toward higher
margin products, primarily TAXUS stents, increased our gross profit as a
percentage of net sales by 0.6 percentage points. Our gross profit for 2005
was reduced as a percentage of net sales by 0.9 percentage points related
to period expenses, including manufacturing start-up costs primarily associated
with our TAXUS Liberté stent system and increased investment in quality
initiatives. The remaining fluctuation in gross profit as a percentage of
net
sales primarily related to the favorable change in currency exchange rates.
Operating
Expenses
Our
operating expenses, excluding purchased research and development and
litigation-related charges, increased $1.571 billion to $4.444 billion in
2006
from $2.873 billion in 2005. Of this increase, $1.299 billion related to
operating expenses associated with the Guidant business. The significant
increase in
each
of
our operating expense categories is primarily a result of Guidant operating
expenses. The following table provides a summary of our operating expenses,
excluding purchased research and development and litigation-related
charges:
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
(in
millions)
|
$
|
%
of Net Sales
|
$
|
%
of Net Sales
|
$
|
%
of Net Sales
|
|||||||||||||
|
Selling,
general and administrative expenses
|
2,675
|
34.2
|
1,814
|
28.9
|
1,742
|
31.0
|
|||||||||||||
|
Research
and development expenses
|
1,008
|
12.9
|
680
|
10.8
|
569
|
10.1
|
|||||||||||||
|
Royalty
expense
|
231
|
3.0
|
227
|
3.6
|
195
|
3.5
|
|||||||||||||
|
Amortization
expense
|
530
|
6.8
|
152
|
2.4
|
112
|
2.0
|
|||||||||||||
Selling,
General and Administrative (SG&A) Expenses
In
2006,
our SG&A expenses increased by $861 million, or 47 percent, as compared
to 2005. As a percentage of our net sales, SG&A expenses increased to
34.2 percent in 2006 from 28.9 percent for the same period in the
prior year. The increase in our SG&A expenses related primarily to: $670
million in expenditures associated with Guidant; $65 million of
acquisition-related costs associated primarily with certain Guidant
integration and retention programs; increases of $63 million due primarily
to
increased headcount attributable to the expansion of our sales force within
our
international regions and Neuromodulation division; and $55 million in
incremental stock-based compensation expense associated with the adoption
of
Statement No. 123(R), Share-Based
Payment.
See the
Critical
Accounting Policies
section
and Note
L - Stock Ownership Plans for
a
more detailed discussion of Statement No. 123(R). SG&A expenses for 2005
included $21 million in costs related to certain business optimization
initiatives and $17 million in costs related to certain retirement
benefits.
In
2005,
our SG&A expenses increased by $72 million, or four percent, as
compared to 2004. The increase primarily related to: approximately
$100 million in increased headcount and higher compensation expense mainly
attributable to the expansion of the sales force within our Interventional
Cardiology business unit and Endosurgery group and costs related to market
development initiatives; $75 million in incremental operating expenses
associated with our 2004 and 2005 acquisitions, primarily Advanced
Bionics; $21 million in costs related to certain business optimization
initiatives; $19 million in stock-based compensation expense associated
primarily with the issuance of deferred stock units in 2005; and
$17 million in costs related to certain retirement benefits. Certain
charges incurred in 2004 partially offset these increases, including a
$110 million enhancement to our 401(k) Plan, and a $90 million
non-cash charge resulting from certain modifications to our stock option
plans.
As a percentage of our net sales, SG&A expenses decreased to
28.9 percent in 2005 from 31.0 percent in 2004 primarily due to the
increase in our net sales in 2005.
Research
and Development (R&D) Expenses
Our
investment in R&D reflects spending on regulatory compliance and clinical
research as well as new product development programs. In 2006, our R&D
expenses increased by $328 million, or 48 percent, as compared to
2005. As a percentage of our net sales, R&D expenses increased to
12.9 percent in 2006 from 10.8 percent in 2005. The increase primarily
related to: the
inclusion of $270 million in expenditures associated with Guidant;
approximately $30 million in costs related to the cancellation of the
TriVascular AAA program; $24 million of stock-based compensation expense
associated with the adoption of Statement No. 123(R); and $13 million of
acquisition-related costs associated with certain Guidant
integration
and retention programs. See the
Purchased Research and Development
section
for further discussion regarding the cancellation of our TriVascular AAA
stent-graft program.
In
2005,
our R&D expenses increased by $111 million, or 20 percent, as compared
to 2004. As a percentage of net sales, R&D expenses increased to 10.8
percent in 2005 from 10.1 percent in 2004. The increase related primarily
to an
increased investment of approximately $60 million in incremental R&D
expense attributable to our 2004 and 2005 acquisitions, primarily Advanced
Bionics and TriVascular. In addition, we increased spending on internal R&D
projects within our Endosurgery group by $25 million.
Royalty
Expense
In
2006,
our royalty expense increased by $4 million, or 2 percent, as compared
to 2005. The increase was due to $25 million of royalty expense associated
with
the CRM and Cardiac Surgery products that we acquired as part of the Guidant
acquisition. This increase was offset by a decrease in royalty expense
attributable to sales of our TAXUS stent system by $20 million to $153
million for 2006 as compared to the prior year due primarily to lower sales
volume. As a percentage of net sales, royalty expense decreased to
3.0 percent in 2006 from 3.6 percent in 2005. This decrease was primarily a
result of the inclusion of net sales from our new CRM and Cardiac Surgery
products, which on average have a lower royalty cost relative to legacy Boston
Scientific net sales.
In
2005,
our royalty expense increased by $32 million, or 16 percent, as
compared to 2004. As a percentage of net sales, royalty expense increased
to
3.6 percent in 2005 from 3.5 percent in 2004. The increase in our
royalty expense related to sales growth of royalty-bearing products, primarily
sales of our TAXUS stent system. Royalty expense attributable to sales of
our
TAXUS stent system increased by $27 million to $174 million for 2005
as compared to 2004.
Amortization
Expense
In
2006,
our amortization expense increased by $378 million, or 249 percent, as
compared to 2005. As a percentage of our net sales, amortization expense
increased to 6.8 percent in 2006 from 2.4 percent in 2005.
The
increase in our amortization expense related primarily to: $334 million of
amortization of intangible assets obtained as part of the Guidant acquisition;
$23 million for the write-off of intangible assets due to the cancellation
of
the TriVascular AAA program; $21 million for the write-off of the intangible
assets associated with developed technology obtained as part of our 2005
acquisition of Rubicon Medical Corporation; and $12 million for the write-off
of
the intangible assets associated with our Real-time Position Management System
(RPM) technology, a discontinued technology platform obtained as part of
our
acquisition of Cardiac Pathways Corporation. The write-off of the RPM intangible
assets resulted from our decision to cease investment in the technology.
The
write-off of the Rubicon developed technology resulted from our decision
to
redesign the first generation of the technology and concentrate resources
on the
development and commercialization of the next-generation product. We do not
expect these program cancellations and related write-offs to impact our future
operations or cash flows materially. Amortization expense for 2005 included
a
$10 million write-off of intangible assets related to our Enteryx®
Liquid Polymer Technology, a discontinued technology platform obtained as
a part
of our acquisition of Enteric Medical Technologies, Inc.. The write-off
resulted from our decision during 2005 to cease selling the Enteryx
product.
In
2005,
our amortization expense increased by $40 million, or 36 percent, as
compared to 2004. As a percentage of our net sales, amortization expense
increased to 2.4 percent in 2005 from 2.0 percent in 2004. The
increase in our amortization expense was due primarily to $25 million in
incremental amortization expense from the intangible assets obtained in
conjunction with our 2004 and 2005
acquisitions,
primarily Advanced Bionics. In addition, amortization expense included a
$10 million write-off of intangible assets related to Enteryx.
Interest
Expense
Our
interest expense increased to $435 million in 2006 as compared to $90 million
in
2005. The increase in our interest expense related primarily to an increase
in
our average debt levels used to finance the Guidant acquisition, as well
as an
increase in our weighted-average borrowing cost. Our average debt levels
for
2006 increased to approximately $7.2 billion as compared to approximately
$2.4
billion for 2005. Our weighted-average borrowing cost for 2006 increased
to
6.1
percent from 3.8 percent for 2005. At December 31, 2006, $5.886 billion, or
81 percent, of our approximately $7.234 billion in outstanding net debt is
at fixed interest rates.
Our
interest expense increased to $90 million in 2005 from $64 million in
2004. The increase in 2005 as compared to 2004 related primarily to an increase
in average market interest rates on our borrowings.
Fair
Value Adjustment
During
2006, we recorded net expense of $95 million to reflect the change in fair
value
related to the sharing of proceeds feature of the Abbott stock purchase,
which
is discussed in further detail at
Note D- Business Combinations to
our
2006 consolidated financial statements included in Item 8 of this
Form 10-K.
This
sharing of proceeds feature is being marked-to-market through earnings based
upon changes in our stock price, among other factors.
Other,
net
Our
other, net reflected expense of $56 million in 2006, income of $13 million
in 2005 and expense of $16 million in 2004. Our other, net included
investment write-downs of $121 million in 2006, $17 million in 2005 and
$58 million in 2004, in each case attributable to an other-than-temporary
decline in fair value of certain strategic alliances. These write-downs were
partially offset by realized gains on investments of $9 million in 2006,
$4
million in 2005 and $36 million in 2004. Our
write-downs during 2006 included charges of $34 million associated with
investment write-downs due primarily to the termination of a gene therapy
trial
being conducted by one of our portfolio companies. In addition, we recorded
$27
million of investment write-downs related to one of our vascular sealing
portfolio companies due to continued delays in its technology development
and
the resulting deterioration in its financial condition. The remaining investment
write-downs were not individually significant. We do not expect these
write-downs to impact our future operations or cash flows materially.
In
addition, our other, net included interest income of $67 million in 2006,
$36 million in 2005 and $20 million in 2004. Our interest income
increased in 2006 as compared to 2005 due primarily to increases in our cash
and
cash equivalents balances and increases in average market interest rates.
Our
interest income in 2005 increased as compared to 2004 due to increases in
average market interest rates.
Tax
Rate
The
following table provides a summary of our reported tax rate:
|
|
|
|
Percentage
Point
Increase (Decrease)
|
|||||||||||||
|
|
2006
|
2005
|
2004
|
2006
versus 2005
|
2005
versus 2004
|
|||||||||||
|
Reported
tax rate
|
1.2%
|
|
29.5%
|
|
28.9%
|
|
(28.3)
|
|
0.6
|
|||||||
|
Impact
of certain charges
|
(20.2%)
|
5.5%
|
|
4.9%
|
|
(25.7)
|
|
0.6
|
||||||||
In
2006,
the decrease in our reported tax rate as compared to 2005 related primarily
to
the impact of certain charges during 2006 that are taxed at different rates
than
our effective tax rate. These charges include: purchased research and
development; asset write-downs; reversal of taxes associated with unremitted
earnings; and tax gain on the sale of intangible assets.
As
of
December 31, 2005, we had recorded a $133 million deferred tax liability
for
unremitted earnings of certain foreign subsidiaries that we had anticipated
repatriating in the foreseeable future. During 2006, we made a significant
acquisition that, when combined with certain changes in business conditions
subsequent to the acquisition, resulted in a reevaluation of this liability.
We
have determined that we will not repatriate these earnings in the foreseeable
future and, instead, we will indefinitely reinvest these earnings in foreign
operations to repay debt obligations associated with the acquisition. As
a
result, we reversed the deferred tax liability and reduced income tax expense
by
$133 million in 2006.
We
currently estimate that our 2007 effective tax rate, excluding certain charges,
will be approximately 21 percent due primarily to our intention to reinvest
offshore substantially all of our offshore earnings. However, acquisitions
or
dispositions in 2007 and geographic changes in the manufacture of our products
may positively or negatively impact our effective tax rate.
In
2005,
the increase in our reported tax rate as compared to 2004 related primarily
to
the impact of certain charges during 2005 that are taxed at different rates
than
our effective tax rate. These charges
include: certain litigation-related charges; purchased research and development;
asset write-downs and employee-related costs that resulted from certain business
optimization initiatives; costs related to certain retirement benefits; and
a
tax adjustment associated with a technical correction made to the American
Jobs
Creation Act.
Litigation-Related
Charges
In
2005,
we recorded a $780 million pre-tax charge associated with the Medinol
litigation settlement. On September 21, 2005, we reached a settlement with
Medinol resolving certain contract and patent infringement litigation. In
conjunction with the settlement agreement, we paid $750 million in cash and
cancelled our equity investment in Medinol.
In
2004,
we recorded a $75 million provision for certain legal and regulatory
matters, which included a civil settlement with the U.S. Department of Justice,
which we paid in 2005.
See
further discussion of our material legal proceedings in Item
3. Legal Proceedings
above
and Note J
— Commitments and Contingencies
to our
2006 consolidated financial statements included in Item 8 of this
Form 10-K.
Purchased
Research and Development
in
conjunction with the Guidant acquisition; a credit of approximately $67 million
resulting primarily from the reversal of accrued contingent payments due
to the
cancellation of the TriVascular AAA program; and an expense of approximately
$17
million resulting primarily from the application of equity method accounting
for
our investment in EndoTex Interventional Systems.
The
$4.169 billion of purchased research and development associated with the
Guidant
acquisition consists primarily of approximately $3.26 billion for acquired
CRM-related products and approximately $540 million for drug-eluting stent
technology shared with Abbott. The purchased research and development value
associated with the Guidant acquisition also includes approximately $369
million
that represents the estimated fair value of the potential milestone payments
of
up to $500 million that we may receive from Abbott upon receipt of certain
regulatory approvals by the vascular intervention and endovascular solutions
businesses it acquired from Guidant. We recorded the amounts as purchased
research and development at the acquisition date because the receipt of the
payments is dependent on future research and development activity and regulatory
approvals, and the asset has no alternative future use as of the acquisition
date.
The
most
significant purchased research and development projects acquired from Guidant
include the Frontier CRM technology and
rights to the everolimus-eluting stent technology that we share with Abbott.
The
Frontier CRM technology represents Guidant’s next-generation pulse
generator platform that will incorporate new components and software while
leveraging certain existing intellectual property, technology, manufacturing
know-how and institutional knowledge of Guidant. We expect to leverage this
platform across all CRM product lines to treat electrical dysfunction in
the
heart. We expect to launch various Frontier-based products commercially in
the
U.S. over the next 36 months, subject to regulatory approval. As of
December 31, 2006, we estimate that the total costs to complete the Frontier
CRM
technology is between $150 million and $200 million. We expect material cash
inflows from Frontier-based products to commence in 2008.
The
$540
million attributable to the everolimus-eluting stent technology represents
the
estimated fair value of the rights to Guidant’s everolimus-based drug-eluting
stent technology we share with Abbott. In December 2006, we launched PROMUS,
our
first-generation everolimus-based stent, supplied by Abbott, in limited
quantities in Europe. We expect to launch a first-generation everolimus-eluting
stent, supplied by Abbott, in the U.S. in 2008, subject to regulatory approval.
We expect to launch an internally manufactured next-generation everolimus-based
stent in Europe in 2010 and in the U.S. in 2011. We expect that material
net
cash inflows (net of operating costs, including research and development
costs
to complete) from our internally manufactured everolimus-based drug-eluting
stent will commence in 2010 or 2011, following its approval in Europe and
in the
U.S. As of December 31, 2006, we estimate that the cost to complete the
next-generation everolimus-eluting stent technology project is between $200
million and $250 million. The in-process projects acquired in conjunction
with
the Guidant acquisition are generally progressing in line with our estimates
as
of the acquisition date.
In
2005,
we recorded $276 million of purchased research and development. Our 2005
purchased research and development consisted of: $130 million relating to
our
acquisition of TriVascular; $73 million relating to our acquisition of Advanced
Stent Technologies, Inc. (AST); $45 million relating to our acquisition of
Rubicon; and $3 million relating to our acquisition of CryoVascular Systems,
Inc. In addition, we recorded $25 million of purchased research and development
in conjunction with obtaining distribution rights for new brain monitoring
technology that Aspect Medical Systems, one of our strategic partners, is
currently developing. This technology is designed to aid the diagnosis and
treatment of depression, Alzheimer’s disease and other neurological conditions.
The
most
significant 2005 purchased research and development projects included
TriVascular’s AAA stent-graft and AST’s Petal™ bifurcation stent, which
collectively represented 73 percent of our 2005
purchased
research and development. During the second quarter of 2006, management
cancelled the TriVascular AAA stent-graft program. The program cancellation
was
due principally to forecasted increases in time and costs to complete the
development of the stent-graft and to receive regulatory approval. We do
not
expect the program cancellation and related write-downs to impact our future
operations or cash flows materially. The cancellation of the TriVascular
AAA
program resulted in the shutdown of our facility in Santa Rosa, California
and
the displacement of approximately 300 employees. During 2006, we recorded a
charge to research and development expenses of approximately $20 million
associated primarily with write-downs of fixed assets and a charge to research
and development expenses of approximately $10 million associated with severance
and related costs incurred in connection with the cancellation of the
TriVascular AAA program. In addition, we recorded an impairment charge related
to the remaining TriVascular intangible assets and reversed our accrual for
contingent payments recorded in the initial purchase accounting. The effect
of
the write-off of these assets and liabilities was a $23 million charge to
amortization expense and a $67 million credit to purchased research and
development during the second quarter of 2006. We completed substantially
the
shutdown activities during the third quarter of 2006.
AST’s
Petal bifurcation stent is designed to expand into the side vessel where
a
single vessel branches into two vessels, permitting blood to flow into both
branches of the bifurcation and providing support at the junction. We estimate
the remaining cost to complete the Petal bifurcation stent to be between
$100 million and $125 million. We expect material net cash inflows
from the Petal bifurcation stent to begin in 2011, which is when we expect
the
stent to be commercially available in the U.S. in a drug-eluting configuration.
The AST Petal bifurcation stent in-process project is generally
progressing in line with our estimates as of the acquisition date.
In
2004,
we recorded $65 million of purchased research and development. Our 2004
purchased research and development consisted primarily of $50 million relating
to our acquisitions of Advanced Bionics and $14 million relating to our
acquisition of Precision Vascular Systems, Inc. The most significant in-process
projects acquired in connection with our 2004 acquisitions included Advanced
Bionics’ bion® microstimulator and drug delivery pump, which
collectively represented 77 percent of our 2004 acquired in-process
projects’ value. The bion microstimulator is an implantable neurostimulation
device designed to treat a variety of neurological conditions. We estimate
the
remaining cost to complete the bion microstimulator for migraine headaches
to be
approximately $35 million. We expect material net cash inflows from the
bion microstimulator to commence in 2011, following its approval in the U.S.,
which we expect to occur in 2010. The Advanced Bionics drug delivery pump
is an
implanted programmable device designed to treat chronic pain. We estimate
the
remaining cost to complete the drug delivery pump to be between $50 million
and $60 million. We continue to assess the pace and risk of development of
the drug delivery pump, as well as general market opportunities for the pump,
which may result in a delay in the timing of regulatory approval or lower
potential market value. We currently expect material net cash inflows from
the
drug delivery pump to commence in 2012, following its approval in the U.S.,
which we expect to occur in 2011 or 2012. The estimated timing and costs
to
complete the bion microstimulator and the drug delivery pump have increased
relative to what we estimated as of the acquisition date; however, we do
not
believe these increases will have a material impact on our results of operations
or financial condition.
The
following tables provide a summary of key performance indicators that we
use to
assess our liquidity and operating performance:
|
(in
millions)
|
2006
|
2005
|
2004
|
|||||||
|
Cash
and cash equivalents
|
$
|
1,668
|
$
|
689
|
$
|
1,296
|
||||
|
Short-term
marketable securities
|
159
|
344
|
||||||||
|
Cash
provided by operating activities
|
1,845
|
903
|
1,804
|
|||||||
|
Cash
used for investing activities
|
9,312
|
551
|
1,622
|
|||||||
|
Cash
provided by (used for) financing activities
|
8,439
|
(954
|
)
|
439
|
||||||
|
EBITDA2
|
(2,273
|
)
|
1,278
|
1,904
|
||||||
|
(in
millions)
|
2006
|
2005
|
||||||
|
Short-term
debt
|
$
|
7
|
$
|
156
|
||||
|
Long-term
debt
|
8,895
|
1,864
|
||||||
|
Gross
debt
|
8,902
|
2,020
|
||||||
|
Less:
cash, cash equivalents and marketable securities
|
1,668
|
848
|
||||||
|
Net
debt
|
$
|
7,234
|
$
|
1,172
|
||||
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. Users of our financial statements should consider this
non-GAAP financial information in addition to, not as a substitute for, or
as
superior to, financial information prepared in accordance with GAAP. Our
EBITDA
included pre-tax charges of $4.715 billion in 2006, $1.112 billion in 2005
and $340 million in 2004; see the Executive
Summary
section
for a description of these charges.
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 cash generated by our operating activities in 2006 as compared
to
2005 is attributable primarily to significant one-time payments made during
2005, consisting of: an approximate $75 million settlement payment made to
the
Department of Justice; a one-time $110 million 401(k) contribution; a cash
settlement with Medinol of $750 million; and tax payments, including those
associated with the American Jobs Creation Act. Cash paid for income taxes
and
interest was $423 million in 2006 and $437 million in 2005. We expect to
make
approximately $400 million in tax payments during the first quarter of 2007
associated primarily with the gain on the sale of Guidant’s vascular
intervention and endovascular solutions businesses to Abbott.
_____________________________
2 The
following represents a reconciliation between EBITDA and net (loss) income:
|
(in
millions)
|
2006
|
2005
|
2004
|
|||||||
|
EBITDA
|
$
|
(2,273
|
)
|
$
|
1,278
|
$
|
1,904
|
|||
|
Interest
income
|
67
|
36
|
20
|
|||||||
|
Interest
expense
|
(435
|
)
|
(90
|
)
|
(64
|
)
|
||||
|
Income
taxes
|
(42
|
)
|
(263
|
)
|
(432
|
)
|
||||
|
Stock-based
compensation expense
|
(113
|
)
|
(19
|
)
|
(91
|
)
|
||||
|
Depreciation
and amortization
|
(781
|
)
|
(314
|
)
|
(275
|
)
|
||||
|
Net
(loss) income
|
$
|
(3,577
|
)
|
$
|
628
|
$
|
1,062
|
|||
Investing
Activities
We
made
capital expenditures of $341 million in 2006 and 2005. Capital expenditures
in 2006 included $107 million associated with our CRM and Cardiac Surgery
divisions. Legacy Boston Scientific capital expenditures declined in 2006
compared to 2005 due to significant capital expenditures incurred in the
prior
year to enhance our manufacturing and distribution capabilities. We expect
to
incur capital expenditures of approximately $450 million during 2007, which
includes a full year of capital expenditures for our CRM and Cardiac Surgery
divisions; and capital expenditures to further upgrade our quality systems,
to
enhance our manufacturing capabilities in order to support a second drug-eluting
stent platform, to facilitate the integration of Guidant and to support
continuous growth in our business units, including our Neuromodulation division.
Our
investing activities during 2006 included: $15.4 billion of cash payments
for
our acquisition of Guidant, including approximately $100 million associated
with
the buyout of options of certain former Guidant vascular
intervention and endovascular solutions
employees in connection with the sale of these businesses to Abbott, and
approximately $800 million of direct acquisition costs; $6.7 billion of cash
acquired from Guidant, including proceeds of $4.1 billion from Guidant’s sale of
its vascular intervention and endovascular solutions businesses to Abbott;
$397
million in contingent payments associated primarily with Advanced
Bionics, CryoVascular and Smart Therapeutics, Inc.; and $65 million of net
payments for strategic alliances with both privately held and publicly traded
entities.
In
January 2007, we acquired EndoTex, a developer of stents used in the treatment
of stenotic lesions in the carotid arteries. In conjunction with the acquisition
of EndoTex, we paid approximately $100 million, which included approximately
five million shares of our common stock valued at approximately $90 million
and
cash of $10 million, in addition to our previous investments and notes issued
of
approximately $40 million, plus future consideration that is contingent upon
EndoTex achieving certain performance-related milestones. We do not expect
significant purchased research and development charges associated with this
acquisition because EndoTex obtained FDA approval of its carotid stent system
prior to acquisition.
Financing
Activities
Our
cash
flows from financing activities reflect issuances and repayments of debt,
payments for share repurchases and proceeds from stock issuances related
to our
equity incentive programs.
We
had
outstanding borrowings of $8.902 billion at December 31, 2006 at a
weighted average interest rate of 6.03 percent as compared to outstanding
borrowings of $2.02 billion at December 31, 2005 at a weighted average
interest rate of 4.8 percent. During 2006, we received net proceeds from
borrowings of $6.888 billion, which
we
used primarily to finance the cash portion of the Guidant
acquisition.
There
were no amounts outstanding against our available credit lines of $2.35 billion
at December 31, 2006. See
Note
F
-
Borrowings and Credit Arrangements
to our
2006 consolidated financial statements included in Item 8 of this
Form 10-K for specific details regarding our 2006 and 2005 debt
transactions.
The
debt maturity schedule for the significant components of our long-term
debt as of December 31, 2006, is as follows:
|
Payments
Due by Period
|
|||||||||||||||||||
|
(in
millions)
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
Total
|
|||||||||||||
|
Term
loan
|
$
|
650
|
$
|
650
|
$
|
1,700
|
$
|
2,000
|
$
|
5,000
|
|||||||||
|
Abbott
loan
|
900
|
900
|
|||||||||||||||||
|
Senior
notes
|
850
|
$
|
2,200
|
3,050
|
|||||||||||||||
|
$
|
650
|
$
|
650
|
$
|
1,700
|
$
|
3,750
|
$
|
2,200
|
$
|
8,950
|
||||||||
We
expect
to use a portion of our operating cash flow to reduce our outstanding debt
obligations over the next several years. We will continue to examine all
of our
operations in order to identify cost improvement measures that will
better align operating expenses with expected revenue levels and reallocate
resources to better support growth initiatives. In addition, we have the
flexibility to sell certain non-strategic assets and implement other strategic
initiatives, which may generate proceeds that would be available for debt
repayment.
As
of
December 31, 2006, our credit ratings were BBB from Fitch Ratings; Baa3 from
Moody’s Investor Service; and BBB from Standard & Poor’s Rating Services
(S&P). These credit ratings are investment grade. The Moody’s and S&P
ratings outlook is currently negative.
Our
revolving credit facility and term loan agreement requires that we maintain
a
ratio of debt to pro forma EBITDA, as defined by the agreement, of less than
or
equal to 4.5 to 1.0 through December 31, 2007 and 3.5 to 1.0 thereafter.
The
agreement also requires that we maintain a ratio of pro forma EBITDA, as
defined
by the agreement, to interest expense of greater than or equal to 3.0 to
1.0. As
of December 31, 2006, we were in compliance with both of these debt covenants.
Exiting 2006, our ratio of debt to pro forma EBITDA was 3.6 to 1.0 and the
ratio
of pro forma EBITDA to interest expense was 5.6 to 1.0. Any breach of these
covenants would require that we obtain waivers from our lenders and there
can be
no assurance that our lenders would grant such waivers. Our inability to
obtain
any necessary waivers, or to obtain them on reasonable terms, could have
a
material adverse impact on our operations.
Equity
In
March
2006, we filed a new public registration statement with the SEC. During the
first quarter of 2006, we increased our authorized common stock from 1.2
billion
shares to 2.0 billion shares in anticipation of our acquisition of Guidant,
and
issued approximately 577 million shares to former Guidant shareholders in
conjunction with the acquisition. In April 2006, we issued approximately
65
million shares of our common stock under this registration statement to Abbott
for $1.4 billion. See
Note D- Business Combinations to
our
2006 consolidated financial statements included in Item 8 of this
Form 10-K
for
further details on the Guidant acquisition and Abbott transaction.
During
2006, we received $145 million in proceeds from stock issuances related to
our stock option and employee stock purchase plans as compared to $94 million
in
2005. 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.
We
did
not repurchase any of our common stock during 2006. We repurchased approximately
25 million shares of our common stock at an aggregate cost of $734 million
in 2005, and 10 million shares of our common stock at an aggregate cost of
$360 million in 2004. Since 1992, we have repurchased approximately
132 million shares of our common stock and we have approximately 12 million
shares of our common stock held in treasury at year-end. Approximately
37 million shares remain under our previous share repurchase
authorizations.
Contractual
Obligations and Commitments
The
following table provides a summary of certain information concerning our
obligations and commitments to make future payments, which is in addition
to our
outstanding principal debt obligations as presented in the previous table.
See
Note
D - Business Combinations, Note F - Borrowings and Credit
Arrangements and
Note
H
-
Leases
to our
2006 consolidated financial statements included in Item 8 of this
Form 10-K for additional information
regarding
our business combinations, debt obligations and lease arrangements. In
accordance with U.S. GAAP, our consolidated balance sheets do not reflect
the
obligations below that relate to expenses incurred in future
periods.
|
Payments
Due by Period
|
||||||||||||||||||||||
|
(in
millions)
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
Total
|
|||||||||||||||
|
Operating
leases
|
$
|
61
|
$
|
47
|
$
|
24
|
$
|
11
|
$
|
5
|
$
|
36
|
$
|
184
|
||||||||
|
Purchase
obligations†
|
182
|
1
|
1
|
1
|
185
|
|||||||||||||||||
|
Minimum
royalty obligations
|
3
|
3
|
3
|
1
|
1
|
6
|
17
|
|||||||||||||||
|
Interest
payments††
|
521
|
497
|
457
|
371
|
214
|
1,013
|
3,073
|
|||||||||||||||
|
|
$
|
767
|
$
|
548
|
$
|
485
|
$
|
384
|
$
|
220
|
$
|
1,055
|
$
|
3,459
|
||||||||
| † |
These
obligations related primarily to inventory commitments and capital
expenditures entered in the normal course of
business.
|
| †† |
Interest
payment amounts related to the $5.0 billion five-year term loan
are
projected using market interest rates as of December 31, 2006.
Future
interest payments may differ from these projections based on changes
in
the market interest rates.
|
Certain
of our business combinations involve the payment of contingent consideration.
See Note
D - Business Combinations
to our
2006 consolidated financial statements included in Item 8 of this
Form 10-K for the estimated maximum potential amount of future contingent
consideration we could be required to pay associated with our business
combinations. Since it is not possible to estimate when, or even if, the
acquired companies will reach their performance milestones or the amount
of
contingent consideration payable based on future revenues, the maximum
contingent consideration has not been included in the table above. Additionally,
we may consider satisfying these commitments by issuing our stock or refinancing
the commitments with cash, including cash obtained through the sale of our
stock.
Certain
of our equity investments give us the option to acquire the company in the
future or may require us to make payments that are contingent upon the company
achieving certain product development targets or obtaining regulatory approvals.
Since it is not possible to estimate when, or even if, we will exercise our
option to acquire these companies or be required to make these contingent
payments, we have not included future potential payments relating to these
equity investments in the table above.
At
December 31, 2006, we had outstanding letters of credit and bank guarantees
of
approximately $90 million, which primarily consisted of financial lines of
credit provided by banks and collateral for workers’
compensation programs. We enter these letters of credit and bank
guarantees in the normal course of business. As of December 31, 2006, we
have
not drawn upon the letters of credit or guarantees. At this time, we do not
believe we will be required to fund any amounts from the guarantees or letters
of credit and, accordingly, we have not recognized a related liability in
our
financial statements as of December 31, 2006. Our letters of credit and bank
guarantees were immaterial at December 31, 2005.
Critical
Accounting Policies
We
have
adopted accounting policies to prepare our consolidated financial statements
in
conformity with U.S. GAAP. We describe these accounting polices in Note A—Significant
Accounting Policies
to our
2006 consolidated financial statements included in Item 8 of this
Form 10-K.
To
prepare our consolidated financial statements in accordance with U.S. GAAP,
management makes estimates and assumptions that may affect the reported amounts
of our assets and liabilities, the disclosure
of
contingent assets and liabilities at the date of our financial statements
and
the reported amounts of our revenue and expenses during the reporting period.
Our actual results may differ from these estimates.
We
consider estimates to be critical (1) if we are required to make
assumptions about material matters that are uncertain at the time of estimation
or (2) if materially different, estimates could have been made or it is
reasonably likely that the accounting estimate will change from period to
period. The following are areas that we consider critical:
Revenue
Recognition
Our
revenue consists primarily of the sale of single-use medical devices. We
consider revenue to be realized or realizable and earned when all of the
following criteria are met: persuasive evidence of a sales
arrangement exists; delivery has occurred or services have been rendered;
the
price is fixed or determinable; and collectibility is reasonably assured.
We
generally meet these criteria at the time of shipment when the risk of loss
and
title passes to the customer or distributor, unless a consignment arrangement
exists. We recognize revenue from consignment arrangements based on product
usage, or implant, which indicates that the sale is complete. For all other
transactions, we recognize revenue when title to the goods and risk of loss
transfer to customers, provided there are no remaining substantive performance
obligations required of us or any matters requiring customer acceptance.
For
multiple-element arrangements, whereby the sale of devices is combined with
future service obligations, we defer revenue on the undelivered elements
based
on verifiable objective evidence of fair value.
We
generally allow our customers to return defective, damaged and, in certain
cases, expired products for credit. In addition, we may allow customers to
return previously purchased products for next-generation product offerings.
We
establish a reserve for sales returns when the initial product is sold. We
base
our estimate for sales returns upon contractual commitments and historical
trends and recorded such amount as a reduction to revenue.
We
offer
sales rebates and discounts to certain customers. We treat sales rebates
and
discounts as a reduction of revenue and classify the corresponding liability
as
current. We estimate rebates for products where there is sufficient historical
information available to predict the volume of expected future rebates. If
we
are unable to estimate the expected rebates reasonably, we record a liability
for the maximum rebate percentage offered.
Inventory
Reserves
We
base
our provisions for excess, obsolete or expired inventory primarily on our
estimates of forecasted net sales levels. A significant change in the timing
or
level of demand for our products as compared to forecasted amounts may result
in
recording additional provisions for excess or expired inventory in the future.
The industry in which we participate is characterized by rapid product
development and frequent new product introductions. Uncertain timing of
next-generation product approvals, variability in product launch strategies,
product recalls and variation in product utilization all impact the estimates
related to excess and obsolete inventory.
Valuation
of Business Combinations
We
allocate the amounts we pay for each acquisition to the assets we acquire
and
liabilities we assume based on their fair values at the dates of acquisition.
We
then allocate the purchase price in excess of net tangible assets acquired
to
identifiable intangible assets, including purchased research and development.
We
base
the fair value of identifiable intangible assets on detailed valuations that
use
information and assumptions provided by management. We allocate any excess
purchase price over the fair value of the net tangible and intangible assets
acquired to goodwill. The use of alternative valuation assumptions, including
estimated cash flows and discount rates, and alternative estimated useful
life
assumptions could result in different purchase price allocations, purchased
research and development charges, and intangible asset amortization expense
in
current and future periods.
The
valuation of purchased research and development represents the estimated
fair
value at the dates of acquisition related to in-process projects. Our purchased
research and development represents the value of in-process projects that
have
not yet reached technological feasibility and have no alternative future
uses as
of the date of acquisition. The primary basis for determining the technological
feasibility of these projects is obtaining regulatory approval to market
the
underlying products in an applicable geographic region. We expense the value
attributable to these in-process projects at the time of the acquisition.
If the
projects are not successful or completed in a timely manner, we may not realize
the financial benefits expected for these projects or for the acquisitions
as a
whole. In addition, we record certain costs associated with our strategic
alliances as purchased research and development.
We
use
the income approach to determine the fair values of our purchased research
and
development. This approach determines fair value by estimating the after-tax
cash flows attributable to an in-process project over its useful life and
then
discounting these after-tax cash flows back to a present value. We base our
revenue assumptions on estimates of relevant market sizes, expected market
growth rates, expected trends in technology and expected product introductions
by competitors. In arriving at the value of the in-process projects, we
consider, among other factors: the in-process projects’ stage of completion; the
complexity of the work completed as of the acquisition date; the costs
already
incurred; the projected costs to complete; the contribution of core technologies
and other acquired assets; the expected introduction date; and the estimated
useful life of the technology. We base the discount rate used to arrive at
a
present value as of the date of acquisition on the time value of money and
medical technology investment risk factors. For the in-process projects we
acquired in connection with our recent acquisitions, we used the following
ranges of risk-adjusted discount rates to discount our projected cash flows:
13
percent to 17 percent in 2006, 18 percent to 27 percent in 2005, and
18 percent to 27 percent in 2004. We believe that the estimated
purchased research and development amounts so determined represent the fair
value at the date of acquisition and do not exceed the amount a third party
would pay for the projects.
Impairment
of Intangible Assets
We
review
our intangible assets quarterly to determine if any adverse conditions exist
or
a change in circumstances has occurred that would indicate impairment or
a
change in their remaining useful life. In addition, we review our
indefinite-lived intangible assets at least annually for impairment and reassess
their classification as indefinite-lived assets. To test for impairment,
we
calculate the fair value of our indefinite-lived intangible assets and compare
the calculated fair values to the respective carrying values.
We
test
our March 31 goodwill balances during the second quarter of each year for
impairment, or more frequently if certain indicators are present or changes
in
circumstances suggest that impairment may exist. In performing the test,
we
calculate the fair value of our reporting units as the present value of
estimated future cash flows using a risk-adjusted discount rate. The selection
and use of an appropriate discount rate requires significant management judgment
with respect to revenue and expense growth rates. We have not recorded
impairment of goodwill in any of the years included in our consolidated
statements of operations.
Investments
in Strategic Alliances
We
account for investments in companies over which we have the ability to exercise
significant influence under the equity method if we hold 50 percent or less
of the voting stock. We account for investments in companies over which we
do
not have the ability to exercise significant influence under the cost method.
Our determination of whether we have the ability to exercise significant
influence over an investment requires judgment. Factors that we consider
in
determining whether we have the ability to exercise significant influence
include, but are not limited to:
•
our
level of representation on the Board of Directors;
•
our
participation in the investee’s policy-making processes;
•
transactions with the investee in the ordinary course of business;
•
interchange of managerial personnel;
•
our
ownership in relation to the concentration of other shareholders.
We
regularly review our strategic alliance investments for impairment
indicators. If
we
determine that impairment exists and it is other-than-temporary, we recognize
an
impairment loss equal to the difference between an investment’s carrying value
and its fair value. Our exposure to loss related to our strategic alliances
is
generally limited to our equity investments and notes receivable associated
with
these alliances.
See
Note A - Significant Accounting Policies and Note C - Investments
in Strategic Alliances to our 2006 consolidated financial statements
included in Item 8 of this Form 10-K for a detailed analysis of our investments
and our accounting treatment for our investment portfolio.
Income
Taxes
We
utilize the asset and liability method for accounting for income taxes. Under
this method, we determine deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of our assets and
liabilities. We measure deferred tax assets and liabilities using the enacted
tax rates and laws that will be in effect when we expect the differences
to
reverse.
We
recognized net deferred tax liabilities of $2.201 billion at December 31,
2006 and $110 million at December 31, 2005. The liabilities relate
primarily to deferred taxes associated with our acquisitions. The assets
relate
primarily to the establishment of inventory and product-related reserves,
litigation and product liability reserves, purchased research and development,
net operating loss carryforwards and tax credit carryforwards. In light of
our
historical financial performance, we believe we will substantially recover
these
assets.
We
reduce
our deferred tax assets by a valuation allowance if, based upon the weight
of
available evidence, it is more likely than not that we will not realize some
portion or all of the deferred tax assets. We consider relevant evidence,
both
positive and negative, to determine the need for a valuation allowance.
Information evaluated includes our financial position and results of operations
for the current and preceding years, as well as an evaluation of currently
available information about future years.
We
do not
provide income taxes on unremitted earnings of our foreign subsidiaries where
we
have indefinitely reinvested such earnings in our foreign operations. It
is not
practical to estimate the amount of income taxes payable on the earnings
that
are indefinitely reinvested in foreign operations. Unremitted earnings of
our
foreign subsidiaries that we have indefinitely reinvested offshore are
$7.186 billion at December 31, 2006 and $2.106 billion at
December 31, 2005.
We
provide for potential amounts due in various tax jurisdictions. In the ordinary
course of conducting business in multiple countries and tax jurisdictions,
there
are many transactions and calculations where
the
ultimate tax outcome is uncertain. Judgment is required in determining our
worldwide income tax provision. In our opinion, we have made adequate provisions
for income taxes for all years subject to audit. Although we believe our
estimates are reasonable, we can make no assurance that the final tax outcome
of
these matters will not be different from that which we have reflected in
our
historical income tax provisions and accruals. Such differences could have
a
material impact on our income tax provision and operating results in the
period
in which we make such determination.
See
Note I
— Income Taxes
to our
2006 consolidated financial statements included in Item 8 of this
Form 10-K for a detailed analysis of our income tax
accounting.
Legal,
Product Liability Costs and Securities Claims
We
are
involved in various legal and regulatory proceedings, including intellectual
property, breach of contract, securities litigation and product liability
suits.
In some cases, the claimants seek damages, as well as other relief, which
if
granted, could require significant expenditures or impact our ability to
sell
our products. We
are
substantially self-insured with respect to general, product liability and
securities claims and 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. In accordance with FASB Statement No. 5,
Accounting for Contingencies,
we
accrue anticipated costs of settlement, damages, loss for general 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. Our accrual for legal matters that
are
probable and estimable was $485 million at December 31, 2006 and
$35 million at December 31, 2005. In connection with our acquisition
of Guidant, the number of product liability claims and other legal proceedings
filed against us, including private securities litigation and shareholder
derivative suits, significantly increased. The amounts accrued at December
31,
2006 represent primarily accrued legal defense costs related to assumed Guidant
litigation and product liability claims recorded as part of the purchase
price.
In connection with the acquisition of Guidant, we are still assessing certain
assumed litigation and product liability 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. See further
discussion of our material legal proceedings in Item
3. Legal Proceedings
above
and Note J
— Commitments and Contingencies
to our
2006 consolidated financial statements included in Item 8 of this
Form 10-K.
Stock-Based
Compensation
On
January 1, 2006, we adopted FASB Statement No. 123(R),
Share-Based Payment,
which
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the consolidated statements of operations
based on their fair values. We adopted Statement No. 123(R) using the
“modified-prospective method” and have not restated prior period results of
operations and financial position to reflect the impact of stock-based
compensation expense under Statement No. 123(R). We
use
the Black-Scholes option-pricing model to calculate the grant-date fair value
of
our stock options. We value restricted stock awards and deferred stock units
based on the closing trading value of our shares on the date of grant. The
following represents the assumptions used in calculating our stock-based
compensation expense that require significant judgment by
management:
Expected
Volatility
- We
have considered a number of factors in estimating volatility. For options
granted prior to 2006, we used our historical volatility as a basis to estimate
expected volatility in our valuation of stock options. We changed our method
of
estimating volatility upon the adoption of Statement No. 123(R). We now consider
historical volatility, trends in volatility within our industry/peer group
and
implied volatility.
Expected
Term
- We
estimate the expected term of our options using historical exercise and
forfeiture data. We believe that this historical data is currently the best
estimate of the expected term of our new option grants.
Estimated
Forfeiture Rate
-We have
applied, based on an analysis of our historical forfeitures, an annual
forfeiture rate of eight percent to all unvested stock awards as of December
31,
2006, which represents the portion that we expect will be forfeited each
year
over the vesting period. We will reevaluate this analysis periodically and
adjust the forfeiture rate as necessary. Ultimately, we will only recognize
expense for those shares that vest.
See
Note
L - Stock Ownership Plans
to our
2006 consolidated financial statements included in Item 8 of this
Form 10-K for further discussion regarding our adoption of Statement No.
123(R).
New
Accounting Standard
In
July
2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes -
an
interpretation of FASB Statement No. 109, Accounting
for Income Taxes,
to
create a single model to address accounting for uncertainty in tax positions.
Interpretation No. 48 requires the use of a two-step approach for recognizing
and measuring tax benefits taken or expected to be taken in a tax return
and
disclosures regarding uncertainties in income tax positions, including a
roll
forward of tax benefits taken that do not qualify for financial statement
recognition. We will record the cumulative effect of initially adopting
Interpretation No. 48 as an adjustment to opening retained earnings in the
year
of adjustment and present such adjustment separately. Only tax positions
that we
are more likely than not to realize at the effective date may be recognized
upon
adoption of Interpretation No. 48. We are required to adopt Interpretation
No. 48 effective for our first quarter of 2007. We are currently in the process
of assessing the impact of the new standard.
Management’s
Report on Internal Control over Financial Reporting
As
the
management of Boston Scientific Corporation, we are responsible for establishing
and maintaining adequate internal control over financial reporting. We designed
our internal control system to provide reasonable assurance to management
and
the Board of Directors regarding the preparation and fair presentation of
our
financial statements.
We
assessed the effectiveness of our internal control over financial reporting
as
of December 31, 2006. In making this assessment, we used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
in
Internal Control—Integrated Framework. Based on our assessment, we believe that,
as of December 31, 2006, our internal control over financial reporting is
effective at a reasonable assurance level based on these criteria.
Ernst &
Young LLP, an independent registered public accounting firm, has issued an
audit
report on management’s assessment of internal control over financial reporting
and on the effectiveness of our internal control over financial reporting.
This
report in which they expressed an unqualified opinion is included below.
|
/s/
James R. Tobin
|
/s/
Lawrence C. Best
|
||
|
President
and Chief Executive Officer
|
Executive
Vice President and Chief Financial Officer
|
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
The
Board
of Directors and Stockholders of Boston Scientific Corporation
We
have audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting, that Boston Scientific
Corporation maintained effective internal control over financial reporting
as of
December 31, 2006, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Boston Scientific Corporation’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management’s assessment and an opinion on the effectiveness of the company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our opinion, management’s assessment that Boston Scientific Corporation
maintained effective internal control over financial reporting as of
December 31, 2006, is fairly stated, in all material respects, based on the
COSO criteria. Also, in our opinion, Boston Scientific Corporation maintained,
in all material respects, effective internal control over financial reporting
as
of December 31, 2006, based on the COSO criteria.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets
of
Boston Scientific Corporation as of December 31, 2006 and December 31,
2005, and the related consolidated statements of operations, stockholders’
equity and cash flows for each of the three years in the period ended
December 31, 2006 of Boston Scientific Corporation and our report dated
February 26, 2007, expressed an unqualified opinion thereon.
/s/
Ernst
& Young LLP
Boston,
Massachusetts
February 26,
2007
We
develop, manufacture and sell medical devices globally and our earnings and
cash
flow are exposed to market risk from changes in currency exchange rates and
interest rates. We address these risks through a risk management program
that
includes the use of derivative financial instruments. We operate the program
pursuant to documented corporate risk management policies. We do not enter
derivative transactions for speculative purposes. Gains and losses on derivative
financial instruments substantially offset losses and gains on underlying
hedged
exposures. Furthermore, we manage our exposure to counterparty nonperformance
on
derivative instruments by entering into contracts with a diversified group
of
major financial institutions and by monitoring outstanding positions.
Our
currency risk consists primarily of foreign currency denominated firm
commitments, forecasted foreign currency denominated intercompany and
third-party transactions and net investments in certain subsidiaries. We
use
both nonderivative (primarily European manufacturing operations) and derivative
instruments to manage our earnings and cash flow exposure to changes in currency
exchange rates. We had currency derivative instruments outstanding in the
contract amount of $3.413 billion at December 31, 2006 and
$3.593 billion at December 31, 2005. We recorded $71 million of
other assets and $27 million of other liabilities to recognize the fair
value of these derivative instruments at December 31, 2006 as compared to
$176 million of other assets and $55 million of other liabilities recorded
at December 31, 2005. A 10 percent appreciation in the U.S. dollar’s
value relative to the hedged currencies would increase the derivative
instruments’ fair value by $112 million at December 31, 2006 and by
$129 million at December 31, 2005. A 10 percent depreciation in
the U.S. dollar’s value relative to the hedged currencies would decrease the
derivative instruments’ fair value by $134 million at December 31, 2006 and
$157 million at December 31, 2005. Any increase or decrease in the
fair value of our currency exchange rate sensitive derivative instruments
would
be substantially offset by a corresponding decrease or increase in the fair
value of the hedged underlying asset, liability or forecasted transaction.
See
Note G - Financial Instruments to our 2006 consolidated financial
statements included in Item 8 of this Form 10-K for detailed information
regarding our derivative financial instruments.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
millions, except per share data)
|
Year
Ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Net
sales
|
$
|
7,821
|
$
|
6,283
|
$
|
5,624
|
||||
|
Cost
of products sold
|
2,207
|
1,386
|
1,292
|
|||||||
|
Gross
profit
|
5,614
|
4,897
|
4,332
|
|||||||
|
Selling,
general and administrative expenses
|
2,675
|
1,814
|
1,742
|
|||||||
|
Research
and development expenses
|
1,008
|
680
|
569
|
|||||||
|
Royalty
expense
|
231
|
227
|
195
|
|||||||
|
Amortization
expense
|
530
|
152
|
112
|
|||||||
|
Litigation-related
charges
|
780
|
75
|
||||||||
|
Purchased
research and development
|
4,119
|
276
|
65
|
|||||||
|
Total
operating expenses
|
8,563
|
3,929
|
2,758
|
|||||||
|
Operating
(loss) income
|
(2,949
|
)
|
968
|
1,574
|
||||||
|
Other
income (expense):
|
||||||||||