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
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For the fiscal year ended
December 31, 2007
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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:
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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:
x No
o
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: o No
x
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: x No
o
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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Act).
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Large Accelerated
Filer x
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Accelerated
Filer o
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Non-Accelerated
Filer o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes: o No
x
The
aggregate market value of the Company’s common stock held by non-affiliates of
the Company was approximately $20.5 billion based on the closing price of the
Company’s common stock on June 29, 2007, 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,
2008, was 1,492,320,521.
TABLE OF CONTENTS
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PART
I
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3
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ITEM
1. BUSINESS
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3
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ITEM
1A. RISK FACTORS
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25
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ITEM
1B. UNRESOLVED STAFF COMMENTS
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34
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ITEM
2. PROPERTIES
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34
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ITEM
3. LEGAL PROCEEDINGS
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34
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ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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34
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PART
II
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35
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ITEM
5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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35
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ITEM
6. SELECTED FINANCIAL DATA
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37
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ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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38
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ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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68
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ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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70
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ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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138
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ITEM
9A. CONTROLS AND PROCEDURES
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138
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ITEM
9B. OTHER INFORMATION
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138
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PART
III
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139
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ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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139
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ITEM
11. EXECUTIVE COMPENSATION
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146
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ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
RELATED STOCKHOLDER MATTERS
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146
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ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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146
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ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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146
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PART
IV
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147
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ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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147
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SIGNATURES
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154
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2
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, 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 the
uses of our products include: 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 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 introduced its initial
products in 1969, a family of steerable catheters 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 $2 million in 1979 to approximately
$8.4 billion in 2007.
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. Our 2006 acquisition of Guidant Corporation, a world leader in
the treatment of cardiac disease, enabled us to become a major provider in the
$10 billion global cardiac rhythm management (CRM) market, enhancing our
overall competitive position and long-term growth potential and further
diversifying our product portfolio. This acquisition has established us as 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,
government contracting 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 due in large part to our
coronary stent product offerings. Coronary stents are tiny, mesh tubes used in
the treatment of coronary artery disease, which are implanted in patients to
prop open arteries and facilitate blood flow to and 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.
3
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™ coronary stent
system, has become the worldwide leader in the drug-eluting coronary stent
market. In addition, we now have access to a second drug-eluting coronary
stent program, which complements our existing TAXUS stent system. During the
fourth quarter of 2006, we initiated a limited launch of the PROMUSÔ everolimus-eluting
coronary stent system, which is a private-labeled XIENCEÔ V drug-eluting
stent system supplied to us by Abbott Laboratories, in certain European
countries and, during 2007, expanded our launch in Europe, as well as in
key countries in other regions. In June 2007, Abbott submitted the final module
of a pre-market approval (PMA) application to the FDA seeking approval in the
U.S. for both the XIENCE V and PROMUS stent systems. In November 2007, the FDA
advisory panel reviewing Abbott’s PMA submission voted to recommend the stent
systems for approval. Following FDA approval, which Abbott is expecting in the
first half of 2008, we plan to launch the PROMUS stent system in the
U.S.
We
continue to enhance our product offerings in the drug-eluting stent market. We
successfully launched our next-generation drug-eluting stent product, the TAXUS®
Liberté® stent system, during 2005 in our Europe and Inter-Continental markets,
and expect to launch the product in the U.S. in the second half of 2008, subject
to regulatory approval. The Liberté coronary stent is designed to further
enhance deliverability and conformability, particularly in challenging
lesions.
Our U.S.
TAXUS stent system sales decreased in 2007 relative to 2006, due in part to a
decline in the size of the U.S. market following recent uncertainty regarding
the perceived risk of late stent thrombosis1 following the use of drug-eluting stents.
However, we believe that recent data addressing this risk and supporting the
safety of drug-eluting stent systems could positively affect the size of the
drug-eluting stent market, as referring cardiologists regain confidence in this
technology.
The Cardiac Rhythm Management
Opportunity
As a
result of our 2006 acquisition of Guidant, 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 manufacture a variety of implantable
devices that monitor the heart and deliver electricity to treat cardiac
abnormalities, including:
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·
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Implantable cardiac defibrillator (ICD) systems used to detect and treat abnormally fast heart rhythms (tachycardia) that could result in sudden cardiac death, including implantable cardiac resynchronization therapy defibrillator (CRT-D) systems used to treat heart failure; and |
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·
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Implantable
pacemaker systems used to manage slow or irregular heart rhythms
(bradycardia), including implantable cardiac resynchronization therapy
pacemaker (CRT-P) systems used to treat heart
failure.
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Tachycardia
(abnormally fast or chaotic heart rhythms) prevents the heart from pumping blood
efficiently and can lead to sudden cardiac death. ICD systems (defibrillators,
leads, programmers, our LATITUDE® Patient Management System and accessories)
monitor the heart and deliver electrical energy, restoring a normal rhythm. Our
defibrillators 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.
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1
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Late stent thrombosis is the
formation of a clot, or thrombus, within the stented area one year or more
after implantation of the
stent.
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4
Heart
failure (the heart’s inability to pump effectively) is a debilitating,
progressive condition, with symptoms including shortness of breath and extreme
fatigue. Statistics show that one in five persons die within the first year of a
heart failure diagnosis, and patients with heart failure suffer sudden cardiac
death 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, may 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 then transmits
the data to a secure Internet server where the physician (or other qualified
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 qualified third party). In addition, this weight
and blood pressure information is available immediately to patients in their
home to assist their compliance with the day-to-day and home-based heart failure
instructions prescribed by their physician.
Strategic
Initiatives
In 2007,
we announced several new initiatives designed to enhance short- and long-term
shareholder value, including:
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·
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the
restructuring of several businesses and product franchises in order to
leverage resources, strengthen competitive positions, and create a more
simplified and efficient business
model;
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the
sale of five non-strategic businesses, including our Auditory, Cardiac
Surgery, Vascular Surgery, Venous Access and Fluid Management businesses;
and
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significant
expense and head count reductions.
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Our goal
is to better align expenses with revenues, while preserving our ability to make
needed investments in quality, research and development projects, capital and
our people that are essential to our long-term success. We expect these
initiatives to help provide better focus on our core businesses and priorities,
which will strengthen Boston Scientific for the future and position us for
increased, sustainable and profitable sales growth. Each of these
initiatives are described more fully in our Management’s Discussion and Analysis
included in Item 7 of this Form 10-K.
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
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 obtain externally
through acquisitions and alliances. Our research and development program is
largely focused on the development of
5
next-generation
and novel technology offerings across multiple programs and divisions. 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. In order to strengthen our corporate-wide quality controls,
we established Project Horizon, a cross-functional initiative to 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. In 2007, we 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. We also engaged a third party to audit our corporate-wide
quality systems as we strive to improve those systems continuously. In
addition, our Board of Directors has 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.” This personal commitment connects our people with the
vision and mission of 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 our 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 demonstrated further by our clinical capabilities.
Our clinical groups focus on driving innovative therapies aimed at transforming
the practice of medicine. Our clinical teams are organized by therapeutic
specialty to better support our research and development
pipeline. During 2007, our clinical organization planned, initiated and
conducted an expanding series of focused clinical trials that support regulatory
and reimbursement requirements and demonstrated the safe and effective clinical
performance of critical products and technologies.
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 increasing 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 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 also focused on examining our operations and general business
activities to identify cost-improvement opportunities in order to enhance our
operational effectiveness. We intend to continue these efforts in
2008.
6
Customer 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.
Active Participation in the Medical
Community
We
believe that we have positive 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 their 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 focus on quality,
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 we have based our
success.
Research and
Development
Our
investment in research and development is critical to driving our future growth.
We have directed our development efforts toward regulatory compliance and
innovative technologies designed to expand current markets or enter new
markets. 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 clinically relevant new products and
technologies and bring 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 2007, we expended $1.091 billion on research and development,
representing approximately 13 percent of our 2007 net sales. Our investment in
research and development reflects:
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·
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regulatory
compliance and clinical research, particularly relating to our
next-generation stent and CRM platforms and other development programs
obtained through our acquisitions;
and
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·
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sustaining
engineering efforts which factor customer (or “post market”) feedback into
continuous improvement efforts for currently marketed
products.
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7
Acquisitions and
Alliances
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. Our 2007 acquisitions
included the following:
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·
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EndoTex
Interventional Systems, Inc., a developer of stents used in the treatment
of stenotic lesions in the carotid arteries, intended to expand our
carotid artery disease portfolio;
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·
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Remon
Medical Technologies, Inc., a development-stage company focused on
creating communication technology for medical device applications,
intended to expand our sensor and wireless communication technology
portfolio and complement our CRM product line;
and
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·
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Celsion
Corporation’s Prolieve®
Thermodilatation System, technology for treating symptomatic benign
prostatic hyperplasia (BPH), intended to expand our technology portfolio
used to treat urologic conditions.
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Our
investment portfolio includes investments in both publicly traded and
privately held companies. Many of these alliances involve complex
arrangements with third parties and some include 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 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 offered for sale principally by three dedicated business
groups—Cardiovascular (including our Interventional Cardiology, CRM and
Cardiovascular businesses), Endosurgery (including our Endoscopy and
Urology/Gynecology businesses, and until February 2008, included our Oncology
business) and Neuromodulation (including our Pain Management business, and,
until January 2008, included our Auditory business). In February 2008, we
completed the sale of our Venous Access franchise, previously part of our
Oncology business, along with our Fluid Management business, and integrated our
remaining Oncology franchises into other business units. In addition, in January
2008, we completed the sale of a controlling interest in our Auditory business,
along with our drug pump development program, to entities affiliated with the
former principal shareholders of Advanced Bionics Corporation. Our
Cardiovascular organization focuses on products and technologies for use in
interventional cardiology, cardiac rhythm management, peripheral interventions,
electrophysiology, neurovascular, and, until January 2008, cardiac surgery and
vascular surgery procedures. In January 2008, we completed the sale of our
Cardiac Surgery and Vascular Surgery businesses. During 2007, we derived
78 percent of our net sales from our Cardiovascular businesses,
approximately 18 percent from our Endosurgery businesses and approximately
four percent from our Neuromodulation business.
The
following section describes certain of our Cardiovascular, Endosurgery and
Neuromodulation offerings as of December 31, 2007, before the divestitures of
certain of our businesses:
Cardiovascular
Coronary Stent
Business
Drug-Eluting
Stents
We are
the market leader in the worldwide drug-eluting stent market. We market our
TAXUS® Express2Ô paclitaxel-eluting
coronary stent system principally in the U.S. and Japan. We also market our
second-generation coronary stent, the TAXUS® Liberté® stent system, in our
Europe and Inter-Continental markets. We expect to launch the TAXUS Liberté
coronary stent system in the U.S. in the second half of 2008,
8
subject
to regulatory approval. In December 2007, we received CE Mark approval for the
use of the TAXUS® Liberté® stent system in diabetic patients, and, in May 2007,
we received CE Mark approval for our TAXUS Liberté Long stent, a specialty stent
designed for more efficient stenting of long lesions.
In the
fourth quarter of 2006, we began marketing our PROMUSÔ everolimus-eluting
coronary stent system in certain of our Europe and Inter-Continental countries,
expanding our drug-eluting stent portfolio to include two distinct drug
platforms. We expect to launch the PROMUS stent system in the U.S. in the first
half of 2008, subject to regulatory approval. We also expect to launch an
internally developed and manufactured next-generation everolimus-based stent
system in Europe in late 2009 or early 2010 and in the U.S. in late 2012 or
early 2013. In addition, we have commenced clinical trials for our
third-generation paclitaxel-eluting stent, the TAXUS® Element™ platinum
chromium coronary stent system. In July 2007, we announced the first
implant of the TAXUS Element stent system.
Bare-Metal
Stents
We offer
our Liberté bare-metal 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 system is designed to enhance deliverability and conformability,
particularly in challenging lesions. We are also developing a bare-metal version
of the TAXUS Element coronary stent system.
Cardiac Surgery and Vascular
Surgery
Cardiac
surgery devices are used to perform endoscopic vessel harvesting, cardiac
surgical ablation and less-invasive coronary artery by-pass surgery. Vascular
Surgery devices include abdominal, thoracic and peripheral vascular grafts for
the treatment of aortic aneurysms and dissections, peripheral vascular occlusive
diseases and dialysis access. In connection with our strategic initiatives, we
identified these businesses as non-strategic and, in January 2008, completed the
sale of our Cardiac Surgery business (acquired with Guidant) and Vascular
Surgery business to the Getinge Group of Sweden.
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) procedures and include
bare-metal and drug-eluting 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. The iLab® Ultrasound Imaging System, launched in
the U.S. in 2006, continues as our flagship console and is compatible with our
full line of imaging catheters. This system enhances the diagnosis and
treatment of blocked vessels and heart disorders. In 2007, we
received approval for the sale of the iLab imaging system in Japan and
other international markets.
Embolic
Protection
Our
FilterWire EZ™ Embolic Protection System is a low profile filter designed to
capture embolic material
9
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 and carotid artery stenting
procedures.
Peripheral
Interventions
We 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 offerings include vascular access products, balloon catheters, stents
and peripheral vascular catheters, wires and accessories. In the first quarter
of 2008, we began integrating certain products used for non-vascular
intervention, previously part of our Oncology business, into our Peripheral
Interventions business. We also sell products designed to treat patients with
non-vascular disease (disease which appears outside the blood system). Our
non-vascular suite of products includes biliary stents, drainage catheters,
biopsy devices and micro-puncture sets, designed to treat, diagnose and palliate
various forms of benign and malignant tumors. We market the PolarCath™
peripheral dilatation system used in CryoPlasty® Therapy, an innovative approach
to the treatment of peripheral artery disease in the lower
extremities. In January 2007, we completed the acquisition of EndoTex
Interventional Systems, Inc., and, in February 2007, launched 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.
In the
first quarter of 2008, we began integrating our Peripheral Interventions
business with our Interventional Cardiology business under a single management
structure to help create a more integrated business focused on interventional
specialists, while enhancing technology and operational
efficiencies.
Neurovascular
Intervention
We market
a broad line of detachable coils (coated and uncoated),
micro-delivery stents, micro-guidewires, micro-catheters, guiding catheters and
embolics to neuro-interventional radiologists 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 NeuroForm® stent for the treatment of wide neck aneurysms and the
Wingspan® Stent System with Gateway® PTA Balloon Catheter, each under a
Humanitarian Device Exemption 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.
Electrophysiology
We offer
medical devices for the diagnosis and treatment of cardiac arrhythmias (abnormal
heartbeats). Included in our product offerings are RF generators, intracardiac
ultrasound and steerable ablation catheters, as well as a line of diagnostic
catheters and associated accessories. Our leading brands include the
Blazer™
cardiac ablation catheter, and the Chilli II™ cooled ablation
catheter, the first bidirectional cooled-tip catheter available in the U.S. We
also offer a next-generation line of RF generators, the MAESTRO 3000® Cardiac
Ablation System. During 2008, we will integrate our Electrophysiology
business with our CRM business in order to serve better the needs of
electrophysiologists by creating a more efficient organization.
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Cardiac Rhythm Management
(CRM)
We offer
a variety of implantable devices that monitor the heart and deliver electrical
impulses to treat cardiac rhythm abnormalities, including tachycardia and
bradycardia. We also offer devices that treat heart failure by delivering
electrical impulses to help the heart to beat in a more coordinated
fashion. A key component of many of our implantable device systems is
our remote LATITUDE® Patient Management System, which provides clinicians with
information about a patient’s device and clinical status non-invasively via the
Internet, allowing for more frequent monitoring in order to guide treatment
decisions.
Our U.S.
CRM product offerings include:
|
·
|
VITALITY®2 ICD
systems;
|
|
·
|
ENDOTAK
RELIANCE® defibrillation leads;
|
|
·
|
CONTAK
RENEWAL® 3 RF CRT-D systems;
|
|
·
|
ACUITY™
Steerable left ventricular leads;
|
|
·
|
INSIGNIA® pacing
systems;
|
|
·
|
DEXTRUS™
pacing leads;
|
|
·
|
LATITUDE®
Patient Management System;
|
|
·
|
LIVIAN™
CRT-D (approved February 2008); and
|
|
·
|
CONFIENT™
ICD (approved February 2008).
|
Our
international CRM product offerings include:
|
·
|
ENDOTAK
RELIANCE® defibrillation leads;
|
|
·
|
CONTAK
RENEWAL® 3 RF CRT-D systems;
|
|
·
|
INSIGNIA®
pacing systems;
|
|
·
|
LIVIAN™
CRT-D; and
|
|
·
|
CONFIENT™
ICD.
|
The year
2007 was characterized by a re-engineering of how we design, build, test and
report on our CRM products. We also saw continued rapid adoption of
our LATITUDE® Patient Management System; we started the year with 11,500
patients enrolled on the LATITUDE System and finished 2007 with more than 80,000
patients enrolled. In November 2007, we announced the industry’s
first patient data integration between a CRM remote monitoring system and a
physician’s electronic medical record, using the LATITUDE System to allow
clinicians to access information from a patient’s ICD device and store this
information within the GE Centricity® Electronic Medical
Record (EMR) system in the form of lab results.
In 2007,
we launched two new lead systems that connect pulse generators to the heart –
the ACUITY™ Steerable left ventricular leads and the DEXTRUS™ pacing
leads. In April 2007, we received regulatory approval for and
launched in Japan our VITALITY® DR ICD system. In addition, in
October 2007, we received CE Mark approval for CONFIENT™, our next-generation
ICD product, and, in December 2007, we received European approval of LIVIAN™, our
next-generation CRT-D device. Further, in the first quarter of 2008, we received
CE Mark approval for our next-generation COGNISÔ CRT-D device and
our next-generation TELIGENÔ ICD system, as well
as U.S. FDA approval for CONFIENT and LIVIAN.
Endosurgery
In March
2007, we announced our intent to explore the benefits that could be gained from
operating our Endosurgery group as a separately traded public company that would
become a majority-owned subsidiary of Boston Scientific. In July 2007, we
completed this exploration and determined that the group will remain wholly
owned by Boston Scientific. The following are the components of our
Endosurgery business:
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 product offerings in this
area include disposable single and multiple biopsy forceps, balloon dilatation
catheters, hemostasis catheters and
11
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 offer
the Radial Jaw® 4 Single-Use Biopsy Forceps, which 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 product offerings 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 May 2007, we announced the worldwide launch
of our Spyglass® Direct Visualization System for direct imaging of the bile
duct system. The Spyglass system 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
management and lithotripsy.
Pulmonary
Intervention
We market
devices to diagnose, treat and palliate diseases of the pulmonary system. Our
product offerings 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 stones;
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 specific sites. We have also developed other devices to
aid in the diagnosis and treatment of bladder cancer and bladder
obstruction.
Prostate
Intervention
We
currently market electro-surgical resection devices designed to resect large
diseased tissue sites for the treatment of benign prostatic hyperplasia (BPH).
We also market disposable needle biopsy devices, designed to take core prostate
biopsy samples. In June 2007, we purchased Celsion Corporation’s ProlieveÒ Thermodilatation
System, a transurethral microwave thermotherapy system for the treatment of BPH,
which we had previously distributed for Celsion. In addition, we distribute and
market 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 areas 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. We have exclusive U.S. distribution rights to the Coaptite®
Injectable Implant, a next-generation bulking agent, for the treatment of stress
urinary incontinence.
12
Gynecology
We also
market other products in the area of women’s health. Our Hydro
ThermAblator® 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
In 2007,
we marketed a broad line of products designed to treat, diagnose and palliate
various forms of benign and malignant tumors. Our suite of products includes
microcatheters, embolic agents and coils designed to restrict blood supply to
targeted sites, as well as radiofrequency-based therapeutic devices for the
ablation of various forms of soft tissue lesions (tumors). Also included in our
oncology portfolio during 2007 was a complete line of venous access products,
used for infusion therapy. In February 2008, we sold our Venous Access
franchise, as well as our Fluid Management business to Avista Capital Partners.
In the first quarter of 2008, we began integrating our remaining Oncology
franchises into other business units. We incorporated our Radiofrequency Tumor
Ablation franchise into our Endoscopy business; our Peripheral Embolization
franchise into our Neurovascular business; and our Non-Vascular Intervention
franchise into our Peripheral Interventions business, which is part of our
Cardiovascular business group.
Neuromodulation
Pain
Management
We market
the Precision® Spinal Cord Stimulation (SCS) 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 sources of other peripheral pain. In July 2007, we launched
our new Precision Plus™ SCS System, the world’s smallest rechargeable SCS
neuromodulation device for the treatment of chronic pain of the trunk, back and
limbs.
Cochlear
Implants
In 2007,
we developed and marketed in the U.S., Europe and Japan the HiResolution® 90K
Cochlear Implant System to restore hearing to the profoundly deaf. We also
offered our next-generation cochlear implant technology, the Harmony™
HiResolution Bionic Ear System. In January 2008, we sold a controlling interest
in our Auditory business and drug pump development program to the principal
former shareholders of Advanced Bionics Corporation. We retained and
continue to operate the Pain Management business and emerging indications
development program acquired with Advanced Bionics in 2004.
A
dedicated sales force of approximately 2,200 individuals in approximately 45
countries internationally, and over 3,700 individuals in the U.S. marketed our
products worldwide as of December 31, 2007. Sales in countries where we
have direct sales organizations accounted for approximately 94 percent of our
net sales during 2007. A network of distributors and dealers who offer our
products worldwide accounts for our remaining sales. We will continue to
leverage our infrastructure in markets where commercially appropriate and use
third parties in those markets where it is not economical or strategic to
establish or maintain a direct presence. 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 2007,
we sold our products to over 10,000 hospitals, clinics, outpatient facilities
and medical offices. We are not dependent on any single institution and no
single institution accounted for more than ten percent of our net sales in
2007. However, large group purchasing organizations, hospital networks and other
13
buying
groups have 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, various graft materials, and pneumatic and laser
lithotripters for use in connection with urology and gynecology procedures.
Employing 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,
during 2007, we operated through three business units divided among the
geographic regions of Europe, Asia Pacific 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 our
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 we can implement 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, Asia Pacific and Inter-Continental. In the first
quarter of 2008, we began operating through two international business
units: EMEA, consisting of Europe, Middle East and Africa; and
Inter-Continental, consisting of Japan, Asia Pacific, Canada and Latin America.
This reorganization is designed to allow for better leverage of infrastructure
and resources as well as restored competitiveness.
International
sales accounted for approximately 41 percent of our net sales in 2007. Net
sales and operating income attributable to our 2007 geographic regions are
presented in Note P—Segment Reporting
to our 2007 consolidated financial statements included in Item 8 of this
Form 10-K.
We have
five international manufacturing facilities in Ireland, one in Costa Rica and
one in Puerto Rico. Presently, approximately 22 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. Through April of 2008, we will continue to share a training facility with
Abbott in Brussels, Belgium, and will then move to our own international
training facility in Paris, France.
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 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 on-going 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 our manufacturing processes and those of our 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
PROMUSÔ
drug-eluting coronary stent systems and our CRM products.
Quality Assurance
On
December 23, 2005, Guidant received an FDA warning letter citing certain
deficiencies with respect to its manufacturing quality systems and record
keeping procedures in its CRM facility in St. Paul, Minnesota. In
14
April
2007, following FDA reinspections of our CRM facilities, we resolved the warning
letter and all associated restrictions were removed.
On
January 26, 2006, legacy Boston Scientific received a corporate warning
letter from the FDA notifying us of serious regulatory problems at three 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 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.
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 made
modifications to our management controls, process validation, corrections and
removals, distribution and product control, corrective and preventive actions,
and complaint management systems. Project Horizon resulted in the
reallocation of internal employee and management resources to quality
initiatives, as well as incremental spending, resulting in adjustments to
product launch schedules of certain products and the decision to discontinue
certain other product lines over time. Project Horizon ended as a formal program
on December 31, 2007 and we transferred all open projects to sustaining
organizations. We have since implemented the Quality Master Plan to drive
continuous improvement in compliance and quality performance. In addition, our
Board of Directors has 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.” This personal commitment connects our people with the vision and
mission of Boston Scientific.
We
believe we have identified solutions to the quality issues cited by the FDA, and
continue to make progress in transitioning our organization to implement those
solutions. We engaged a third party to audit our enhanced quality systems in
order to assess our corporate-wide compliance prior to reinspection by the FDA.
We completed substantially all of these third-party audits during 2007 and, in
February 2008, the FDA commenced its reinspection of certain of our facilities.
We believe that these reinspections represent a critical step toward the
resolution of the corporate warning letter.
In
addition, in August 2007, we received a warning letter from the FDA regarding
the conduct of clinical investigations associated with our abdominal aortic
aneurysm (AAA) program acquired from TriVascular, Inc. We are taking corrective
action and have made certain commitments to the FDA regarding the conduct of our
clinical trials. We terminated the TriVascular AAA program in 2006
and do not believe the recent warning letter will have an impact on the timing
of the resolution of our corporate warning letter.
We are
committed to providing high quality products to our customers. To meet this
commitment, we have implemented 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 intended 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
15
performance
improvement around these aspects. At present, nine of our manufacturing and
distribution facilities have attained ISO 14001 certification. We expect to
continue this initiative 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 we sell our products 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 that sell a
single or limited number of competitive products or participate in only a
specific market segment. Since we acquired Guidant, Abbott has become a primary
competitor of ours in the interventional cardiology market and we now compete
with St. Jude Medical, Inc. in the CRM and neuromodulation markets. 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 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 been increasingly required to compete on the basis
of price, value, clinical outcomes, 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 three
ways. The first process requires that a pre-market notification (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 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 that do
not raise new questions of safety or effectiveness can generally be made 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.
16
The
second process requires the submission of an application for PMA 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 third
process requires that an application for a Humanitarian Device Exemption
(HDE) be made to the FDA for the use of a Humanitarian Use Device (HUD). A
HUD is intended to benefit patients by treating or diagnosing a disease or
condition that affects, or is manifested in, fewer than 4,000 individuals in the
U.S. per year. The application submitted to the FDA for an HDE is similar in
both form and content to a PMA application, but is exempt from the effectiveness
requirements of a PMA. This approval process demonstrates there is no
comparable device available to treat or diagnose the condition, the device will
not expose patients to unreasonable or significant risk, and the benefits to
health from use outweigh the risks. The HUD provision of the regulation provides
an incentive for the development of devices for use in the treatment or
diagnosis of diseases affecting small patient populations.
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 U.S. 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 selling 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 are also
required to comply with 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. The time required to obtain these foreign approvals to
market our products may vary from U.S. approvals, and requirements for these
approvals 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 that 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.
17
In 2007,
we were recognized for environmental stewardship, winning a Leadership in Energy
and Environmental Design (LEED) award for our new research and development
facility in Maple Grove, Minnesota. We also expect to receive LEED
awards for renovation projects that have been completed at our Marlborough and
Quincy facilities in Massachusetts.
In early
2007, we joined the U.S. Climate Action Partnership (USCAP). USCAP is
a diverse group of 27 major businesses and six environmental non-governmental
organizations with a commitment to work with Congress and the President to
rapidly enact legislation that would significantly slow, stop and reverse the
growth of greenhouse gas emissions.
Third-Party Coverage and
Reimbursement
Our
products are purchased principally by hospitals, physicians and other healthcare
providers around the world that typically bill various third-party payors,
including 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 independently determined
assessment criteria. 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
covered automatically 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
18
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 our business.
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 that
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. In the normal course of business, product
liability and securities claims are asserted against us. Product liability and
securities claims may be asserted against us in the future related to unknown
events at the present time. We are substantially self-insured with respect to
general and product liability claims. We maintain insurance policies providing
limited coverage against securities claims. The absence of significant
third-party insurance coverage increases our potential exposure to unanticipated
claims or adverse decisions. Product liability claims, product recalls,
securities litigation and other litigation in the future, regardless of their
outcome, could have a material adverse effect on our 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, 2007, we had approximately 27,500 employees, including
approximately 13,700 in operations; 1,900 in administration; 4,900 in clinical,
regulatory and research and development; and 7,000 in selling, marketing,
distribution and related administrative support. Of these employees, we employed
approximately 9,200 outside the U.S., approximately 5,500 of whom
are in the manufacturing operations function. We believe that the continued
success of our business will depend, in part, on our ability to attract and
retain qualified personnel. In October 2007, we committed to an expense and
headcount reduction plan, which will result in the elimination of approximately
2,300 positions worldwide. More than half of the employees impacted
by the head count reduction plan were notified in the fourth quarter of 2007,
and effectively ceased providing services to us; however due to certain
notification period requirements, many of the impacted employees did not
terminate employment with us until January 2008. As of January
31, 2008, as a result of these employment terminations and the divestiture of
certain of our businesses, we had approximately 24,500 employees.
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.
19
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” within the meaning of Section 27E of the
Securities Exchange Act of 1934. Forward-looking statements may be identified by
words like “anticipate,” “expect,” “project,” “believe,” “plan,” “estimate,”
“intend” and similar words and include, among other things, statements regarding
our financial performance,; our growth strategy; the effectiveness of our
restructuring, expense and head count reduction initiatives; timing of
regulatory approvals; our regulatory and quality compliance; expected research
and development efforts; product development and new product launches; our
market position and competitive changes in the marketplace for our products; the
effect of new accounting pronouncements; the outcome of matters before taxing
authorities; intellectual property and litigation matters;
our capital needs and expenditures; our ability to meet the financial
covenants required by our term loan and revolving credit facility, or to
renegotiate the terms of or obtain waivers for compliance with those covenants;
and potential acquisitions and divestitures. These forward-looking statements
are based on our beliefs, assumptions and estimates using information available
to us at this 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.”
Coronary Stent
Business
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•
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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 stent
platforms;
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•
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Our
ability 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 positions through
reinvestment in our two drug-eluting stent
programs;
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•
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Our
share of the worldwide drug-eluting stent market, the impact of concerns
relating to late stent thrombosis on the size of the coronary stent
market, the 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;
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20
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•
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The
overall performance of, and continued physician confidence in, our and
other drug-eluting stent systems, our ability to adequately address
concerns regarding the perceived risk of late stent thrombosis, and the
results of drug-eluting stent clinical trials undertaken by us, our
competitors or other third parties;
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•
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The
penetration rate of drug-eluting stent technology in the U.S. and
international markets;
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•
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Our
ability to leverage our position as an early entrant 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;
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•
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Changes
in FDA clinical trial and post-market surveillance requirements and the
associated impact on new product launch schedules and the cost of product
approval and compliance;
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•
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Our
ability to manage inventory levels, accounts receivable, gross margins and
operating expenses and to react effectively to worldwide economic and
political conditions;
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•
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Our
ability to retain key members of our cardiology sales force and other key
personnel; and
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•
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Our
ability to manage the mix of our PROMUSÔ stent system
revenue relative to our total drug-eluting stent revenue and to launch a
next-generation everolimus-eluting stent system with profit margins more
comparable to our TAXUS® stent system, and to maintain our overall
profitability as a percentage of
revenue.
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CRM
Business
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•
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Our
estimates for the worldwide CRM market, the recovery of the CRM market to
historical growth rates and our ability to increase CRM net
sales;
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•
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The
overall performance of, and referring physician, implanting physician and
patient confidence in, our and our competitors’ CRM products and
technologies, including our LATITUDE® Patient Management System and
next-generation pulse generator
platform;
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•
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The
results of CRM clinical trials undertaken by us, our competitors or other
third parties;
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Our
ability to launch various products utilizing our next-generation CRM pulse
generator platform in the U.S. over the next 12 to 24 months and to expand
our CRM market position through reinvestment in our CRM products and
technologies;
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•
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Our
ability to retain key members of our CRM sales force and other key
personnel;
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Competitive
offerings in the CRM market and the timing of receipt of regulatory
approvals to market existing and anticipated CRM products and
technologies;
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•
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Our
ability to continue to implement a direct sales model for our CRM products
in Japan; and
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•
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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.
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21
Litigation and Regulatory
Compliance
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•
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Any
conditions imposed in resolving, or any inability to resolve, our
corporate warning letter or other FDA matters, as well as risks generally
associated with our regulatory compliance and quality
systems;
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•
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Our
ability to minimize or avoid future FDA warning letters or field actions
relating to our products;
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•
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The
effect of our litigation; risk management practices, including
self-insurance; and compliance activities on our loss contingencies, legal
provision and cash flows;
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The
impact of our stockholder derivative and class action, patent, product
liability, contract and other litigation, governmental investigations and
legal proceedings;
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The
on-going, inherent risk of potential physician advisories or field actions
related to medical devices;
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•
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Costs
associated with our on-going compliance and quality activities and
sustaining organizations; and
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The
impact of increased pressure on the availability and rate of third-party
reimbursement for our products and procedures
worldwide.
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Innovation
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•
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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;
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•
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Our
ability to manage research and development and other operating expenses
consistent with our expected revenue
growth;
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•
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Our
ability to develop next-generation products and technologies within our
drug-eluting stent and CRM businesses, as well as our ability to develop
products and technologies successfully in addition to these
technologies;
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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;
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Our
failure to succeed at, or our decision to discontinue, any of our growth
initiatives;
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•
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Our
ability to integrate the acquisitions and other alliances we have
consummated, including Guidant;
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•
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Our
decision to exercise, or not to exercise, options to purchase certain
companies with which we have alliances and our ability to fund with cash
or common stock these and other acquisitions, or to fund contingent
payments associated with these
alliances;
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Our
ability to prioritize our internal research and development project
portfolio and our external investment portfolio to keep expenses in line
with expected revenue levels, or our decision to sell, discontinue, write
down or reduce the funding of certain of these
projects;
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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
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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.
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22
International
Markets
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•
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Dependency
on international net sales to achieve
growth;
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•
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Risks
associated with international operations, including compliance with local
legal and regulatory requirements as well as changes in reimbursement
practices and policies; and
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•
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The
potential effect of foreign currency fluctuations and interest rate
fluctuations on our net sales, expenses and resulting
margins.
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Liquidity
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•
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Our
ability to generate sufficient cash flow to fund operations, capital
expenditures, and strategic investments, as well as debt reduction over
the next twelve months and beyond;
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•
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Our
ability to maintain positive operating cash flow in 2008 and to generate
sufficient cash flow to effectively manage our debt levels and minimize
the impact of interest rate fluctuations on our earnings and cash
flows;
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•
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Our
ability to recover substantially all of our deferred tax
assets;
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Our
ability to access the public and private capital markets and to issue debt
or equity securities on terms reasonably acceptable to
us;
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Our
ability to regain investment-grade credit ratings and to remain in
compliance with our financial covenants;
and
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•
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Our
ability to implement, fund, and achieve sustainable cost improvement
measures, including our expense and head count reduction initiatives and
restructuring program, that will better align operating expenses with
expected revenue levels and reallocate resources to better support growth
initiatives.
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Other
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•
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Risks
associated with significant changes made or to be made to our
organizational structure, or to the membership of our executive
committee;
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Risks
associated with our acquisition of Guidant, including, among other things,
the indebtedness we have incurred and the integration costs and challenges
we will continue to face;
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•
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Our
ability to retain our key employees and avoid business disruption and
employee distraction as we execute our expense and head count reduction
initiatives; and
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Our
ability to maintain management focus on core business activities while
also concentrating on resolving the corporate warning letter and
implementing strategic initiatives, including expense and head count
reductions and our restructuring program, in order to streamline our
operations and reduce our debt
obligations.
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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
23
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.
24
ITEM 1A. RISK
FACTORS
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 cardiac
rhythm management (CRM) products. A decline in market size, a failure of market
growth rates to return to historic levels, increased competition, supply
interruption or product launch delays may materially adversely affect our
results of operations, our financial position, including our goodwill balances,
or financial condition.
Drug-eluting
coronary stent revenues represented approximately 21 percent of our consolidated
net sales during the year ended December 31, 2007. Our U.S. TAXUS® sales
declined in 2007 relative to prior years, due in part to a decline in the U.S.
market size attributable to recent uncertainty regarding the perceived 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 addition, a decline in the
overall percutaneous coronary intervention market contributed to the decline in
our TAXUS stent system sales in 2007. There can be no assurance that these
concerns will be alleviated in the near term or that drug-eluting stent
penetration rates or the size of the U.S. drug-eluting stent market will return
to previous levels. In 2007, our TAXUS stent system and Johnson & Johnson’s
CYPHER® stent system were the only two drug-eluting stents available in the U.S.
market. In February 2008, Medtronic received FDA approval for its Endeavor®
drug-eluting stent system. 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,
including Abbott’s anticipated launch of the XIENCEÔ V
everolimus-eluting stent system in the first half of 2008. Abbott currently
sells its XIENCE V 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 everolimus-eluting stent technology,
including its XIENCE V everolimus-eluting stent program. As a result of our
sharing arrangements, we are reliant on Abbott’s regulatory and clinical
activities and on their continued supply of both PROMUSÔ everolimus-eluting
stent systems and certain components utilized in our drug-eluting stent research
and development programs. Delays in receipt of regulatory approvals for
the XIENCE V stent system, receipt of insufficient quantities of the PROMUS
stent system from Abbott, material nonacceptance of these stents in the
marketplace, or disruption in our supply of components (including everolimus)
for research and development could adversely affect our results of operations,
as well as our ability to effectively differentiate ourselves from our
competitors in the drug-eluting stent market as the leading competitor with two
drug-eluting stent programs.
During
2007 and 2006, the operating and financial performance of our CRM business was
adversely impacted by various ICD and pacemaker system field actions in the
industry and a corresponding reduction in CRM market growth rates. The worldwide
CRM market growth rate, including the growth rate of the U.S. ICD market,
declined during 2007; these growth levels are below those experienced in recent
years. The U.S. ICD market represents approximately 40 percent 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 lost
due to contraction of the market or increase net sales in a timely manner, if at
all.
25
Because we derive a significant
amount of our revenues from our cardiovascular businesses, 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
operations.
During
2007, we derived approximately 79 percent of our net sales from our
cardiovascular group, which includes our Interventional Cardiology, CRM and
Cardiovascular businesses. As a result, our sales growth and profitability from
our cardiovascular businesses may be limited by risks and uncertainties related
to market or regulatory conditions that impact those businesses. 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
operations. Revenue from drug-eluting coronary stent systems represented
approximately 24 percent of our consolidated net sales for 2007. If the
decline in U.S. drug-eluting stent market penetration rates attributable to
concerns regarding the perceived risk of late stent thrombosis following the use
of drug-eluting stents or the declines in 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 CRM
technologies could further expose us to fluctuations and uncertainties in these
markets.
We may be unable to resolve issues
related to our FDA warning letters in a timely manner, which could delay the
production and sale of our products and have a material adverse impact on our
business, financial condition and results of
operations.
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. 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 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 the anticipated U.S. launch of our Taxus® Liberté® drug-eluting stent
system, which may weaken our competitive position in the drug-eluting stent
market.
In
addition, in August 2007, we received a warning letter from the FDA regarding
the conduct of clinical investigations associated with our TriVascular abdominal
aortic aneurysm (AAA) program. We are taking corrective action and have made
certain commitments to the FDA regarding the conduct of our clinical trials. We
terminated the TriVascular AAA program in 2006 and do not believe the recent
warning letter will have an impact on the timing of the resolution of our
corporate warning letter.
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 quality system regulations 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.
26
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 (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:
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•
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take
a significant period of time;
|
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•
|
require
the expenditure of substantial
resources;
|
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•
|
involve
rigorous pre-clinical and clinical testing, as well as increased
post-market surveillance
requirements;
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•
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require
changes to the products; and
|
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•
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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 or conditioned upon extensive post-market study
requirements.
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
medical device manufacturer, we are required to register with the FDA and are
subject to periodic inspection by the FDA for compliance with its 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 monitored rigorously 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.
27
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, have historically moved quickly to new products and new
technologies. As a result, intellectual property rights, particularly patents
and trade secrets, play a significant role in product development and
differentiation. However, intellectual property litigation to defend or create
market advantage is inherently complex and unpredictable. Furthermore, appellate
courts frequently overturn lower court patent decisions.
In
addition, competing parties frequently file multiple suits to leverage patent
portfolios across product lines, technologies and geographies and to balance
risk and exposure between the parties. In some cases, several competitors are
parties in the same proceeding, or in a series of related proceedings, or
litigate multiple features of a single class of devices. These forces frequently
drive settlement not only of individual cases, but also of a series of pending
and potentially related and unrelated cases. In addition, although monetary and
injunctive relief is typically sought, remedies and restitution are generally
not determined until the conclusion of the proceedings and are frequently
modified on appeal. Accordingly, the outcomes of individual cases are difficult
to time, predict or quantify and are often dependent upon the outcomes of other
cases in other geographies.
Several
third parties have asserted that our current and former stent systems or other
products infringe patents owned or licensed by them. We have similarly
asserted that stent systems or other products sold by our
competitors infringe patents owned or licensed by us. Adverse outcomes in
one or more of these proceedings 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.
Patents
and other proprietary rights are and will continue to 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
attempt to review third-party patents and patent applications to the extent
publicly available in order 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 the issuance of 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.
28
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 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
and Medtronic, Inc.
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. Our efforts to settle product liability cases, including
Guidant litigation, may not be successful.
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 losses 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 and product liability claims.
We maintain insurance policies providing limited coverage against securities
claims. The absence of significant third-party insurance coverage increases our
potential exposure to unanticipated claims 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 some 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;
|
29
|
|
•
|
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 may not realize the expected
benefits from our expense reduction measures; our long-term expense reduction
programs may result in an increase in short-term expense; and our head count
reductions may lead to additional unintended
consequences.
As part
of our efforts to reduce expenses, improve our operating cost structure and
better position ourselves competitively, we are implementing several expense
reduction measures. These cost reduction initiatives include cost improvement
measures designed to better align operating expenses with expected revenue
levels, resource reallocations, head count reductions, the sale of certain
non-strategic assets and efforts to streamline our business, among other
actions. These measures could yield unintended consequences, such as
distraction of our management and employees, business disruption, attrition
beyond our planned reduction in workforce and reduced employee
productivity. We may be unable to attract or retain key
personnel. Attrition beyond our planned reduction in workforce or a
material decrease in employee morale or productivity could negatively affect our
business, financial condition and results of operations. In addition,
our head count reductions may subject us to the risk of litigation, which could
result in substantial cost. Moreover, our expense reduction programs
could result in current period charges and expenses that could impact our
operating results. We cannot guarantee that these measures, or other
expense reduction measures we take in the future, will result in the expected
cost savings.
We have decided to divest certain
non-strategic assets. These divestitures could pose significant risks
and may materially adversely affect our business, financial condition and
operating results.
We have
divested certain non-strategic assets, including our Auditory, Cardiac Surgery,
Vascular Surgery, Fluid Management and Venous Access businesses, and continue to
seek to identify other non-strategic assets for sale. Divestitures of
businesses may involve a number of risks, including the diversion of management
and employee attention, significant costs and expenses, the loss of customer
relationships, revenues and earnings associated with the divested business, and
the disruption of operations in the affected business. In addition,
divestitures involve significant post-closing separation activities through
transition service arrangements, which could involve the expenditure of
significant financial and employee resources and under which we will be reliant
on third parties for the provision of significant services. Our
inability to effectively consummate identified divestitures or manage the
post-separation transition arrangements could adversely affect our business,
financial condition and results of operations.
We incurred substantial indebtedness
in connection with our acquisition of Guidant and if we are unable to manage our
debt levels, it could have an adverse effect on our financial condition or
results of operations.
We had
total debt of $8.189 billion at December 31, 2007, attributable in large part to
our acquisition of Guidant. We will be required to use a significant portion of
our operating cash flows 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 flows, and have decided to sell certain
non-strategic assets and have implemented other strategic initiatives to
generate proceeds that would be available for debt repayment. There
can be no assurance that
30
these
initiatives will be effective in reducing expenses sufficiently to enable us to
repay our indebtedness. Our term loan and revolving credit facility
agreement contains financial covenants that require us to maintain specified
financial ratios. If we are unable to maintain these covenants, 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.
Our credit ratings are currently
below investment grade, which could have an adverse impact on our ability to
borrow funds or issue debt securities in the public capital
markets.
During
the third quarter of 2007, our credit ratings from Standard & Poor’s Rating
Services and Fitch Ratings were downgraded to BB+, and our credit rating from
Moody’s Investor Service was downgraded to Ba1. All of these are below
investment grade ratings and the ratings outlook by all three rating agencies is
currently negative. These credit rating changes and our inability to
regain investment grade credit ratings could increase the cost of borrowing
funds in the future 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. in the second half
of 2008, subject to regulatory approval. In addition, we expect to continue to
invest in our CRM technologies, including our LATITUDE® Patient Management
System and our next-generation CRM pulse generator platform. 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 materially 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 we now
compete with St. Jude Medical, Inc. in the CRM and neuromodulation markets.
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 in only
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.
31
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 41 percent of our net sales in
2007. 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, most international jurisdictions have adopted regulatory
approval and periodic renewal requirements for medical devices, and we must
comply with these requirements in order to market our products in these
jurisdictions. Further, some emerging markets rely on the FDA’s Certificate for
Foreign Government (CFG) in lieu of their own regulatory approval requirements.
Our FDA corporate warning letter prevents our ability to obtain CFGs;
therefore, our ability to market new products or renew marketing approvals in
countries that rely on CFGs will continue to be impacted until the corporate
warning letter is revolved. 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, physicians and other healthcare
providers around the world that typically bill various third-party payors,
including governmental programs (e.g., Medicare and Medicaid), private insurance
plans and managed care programs, 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
reimbursement systems in the U.S., Japan, or other international countries 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.
32
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 Guidant’s 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, government contracting requirements, 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.
33
There are
no 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, 2007,
our manufacturing, research, distribution and other key facilities totaled more
than 10 million square feet, of which more than seven million square feet were
owned by us and the balance under lease arrangements. As of December 31,
2007, 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, 2007, we maintained 37 manufacturing, distribution and
technology centers, 26 in the U.S., one in Puerto Rico, five in Ireland, one in
Costa Rica, two in The Netherlands and two in Japan. Many of these facilities
produce and manufacture products for more than one of our divisions and include
research facilities. In addition, we share a training facility in Brussels,
Belgium with Abbott and are currently building our own international training
institute in Paris, France, which is scheduled to open in the first half of
2008. The following is a summary of our facilities (in
square feet):
|
|
Total
Space
|
|
Owned
|
|
Leased
|
|
|
Domestic
|
|
8,006,000
|
|
5,912,000
|
|
2,094,000
|
|
Foreign
|
|
2,769,000
|
|
1,386,000
|
|
1,383,000
|
|
Total
|
|
10,775,000
|
|
7,298,000
|
|
3,477,000
|
|
|
|
|
|
|
|
|
See Note L—Commitments and
Contingencies to our 2007 consolidated financial statements included in
Item 8 of this Form 10-K.
None.
34
PART II
ITEM
5. MARKET FOR THE COMPANY'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our
common stock is traded on the New York Stock Exchange (NYSE) under the symbol
"BSX." Our annual CEO certification for the previous year has been submitted to
the NYSE.
The
following table provides the market range for our common stock for each of the
last eight quarters based on reported sales prices on the NYSE.
|
High
|
Low
|
|||||||
|
2007
|
||||||||
|
First
Quarter
|
$ |
18.59
|
$ |
14.22
|
||||
|
Second
Quarter
|
16.67
|
14.59
|
||||||
|
Third
Quarter
|
15.72
|
12.16
|
||||||
|
Fourth
Quarter
|
15.03
|
11.47
|
||||||
|
2006
|
||||||||
|
First
Quarter
|
$ |
26.48
|
$ |
20.90
|
||||
|
Second
Quarter
|
23.30
|
16.65
|
||||||
|
Third
Quarter
|
17.75
|
14.77
|
||||||
|
Fourth
Quarter
|
17.18
|
14.65
|
||||||
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 20, 2008, there were 15,182 record holders of our common
stock.
The
closing price of our common stock on February 20, 2008 was
$12.61.
We did
not repurchase any of our common stock in 2007 or 2006. We repurchased
approximately 25 million shares of our common stock at an aggregate cost of
$734 million in 2005. There are approximately 37 million remaining
shares authorized for purchase under our share repurchase program. We currently
do not anticipate material repurchases in 2008.
35
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, 2003, and that
all dividends were reinvested.
36
ITEM
6. SELECTED FINANCIAL
DATA
(in
millions, except per share data)
Operating Data
|
Year Ended December
31,
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Net
sales
|
$ |
8,357
|
$ |
7,821
|
$ |
6,283
|
$ |
5,624
|
$ |
3,476
|
||||||||||
|
Gross
profit
|
6,015
|
5,614
|
4,897
|
4,332
|
2,515
|
|||||||||||||||
|
Selling,
general and administrative expenses
|
2,909
|
2,675
|
1,814
|
1,742
|
1,171
|
|||||||||||||||
|
Research
and development expenses
|
1,091
|
1,008
|
680
|
569
|
452
|
|||||||||||||||
|
Royalty
expense
|
202
|
231
|
227
|
195
|
54
|
|||||||||||||||
|
Amortization
expense
|
641
|
530
|
152
|
112
|
89
|
|||||||||||||||
|
Purchased
research and development
|
85
|
4,119
|
276
|
65
|
37
|
|||||||||||||||
|
Restructuring
charges
|
176
|
|||||||||||||||||||
|
Litigation-related
charges
|
365
|
780
|
75
|
15
|
||||||||||||||||
|
Loss
on assets held for sale
|
560
|
|||||||||||||||||||
|
Total
operating expenses
|
6,029
|
8,563
|
3,929
|
2,758
|
1,818
|
|||||||||||||||
|
Operating
(loss) income
|
(14 | ) | (2,949 | ) |
968
|
1,574
|
697
|
|||||||||||||
|
(Loss)
income before income taxes
|
(569 | ) | (3,535 | ) |
891
|
1,494
|
643
|
|||||||||||||
|
Net
(loss) income
|
(495 | ) | (3,577 | ) |
628
|
1,062
|
472
|
|||||||||||||
|
Net
(loss) income per common share
|
||||||||||||||||||||
|
Basic
|
$ | (0.33 | ) | $ | (2.81 | ) | $ |
0.76
|
$ |
1.27
|
$ |
0.57
|
||||||||
|
Assuming
dilution
|
$ | (0.33 | ) | $ | (2.81 | ) | $ |
0.75
|
$ |
1.24
|
$ |
0.56
|
||||||||
|
Weighted-average
shares outstanding — basic
|
1,486.9
|
1,273.7
|
825.8
|
838.2
|
821.0
|
|||||||||||||||
|
Weighted-average
shares outstanding — assuming dilution
|
1,486.9
|
1,273.7
|
837.6
|
857.7
|
845.4
|
|||||||||||||||
|
Balance Sheet
Data
|
||||||||||||||||||||
|
As of December
31,
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Cash,
cash equivalents and marketable securities
|
$ |
1,452
|
$ |
1,668
|
$ |
848
|
$ |
1,640
|
$ |
752
|
||||||||||
|
Working
capital*
|
2,671
|
3,399
|
1,152
|
684
|
487
|
|||||||||||||||
|
Total
assets
|
31,197
|
30,882
|
8,196
|
8,170
|
5,699
|
|||||||||||||||
|
Borrowings
(long-term and short-term)
|
8,189
|
8,902
|
2,020
|
2,367
|
1,725
|
|||||||||||||||
|
Stockholders’
equity
|
15,097
|
15,298
|
4,282
|
4,025
|
2,862
|
|||||||||||||||
|
Book
value per common share
|
$ |
10.12
|
$ |
10.37
|
$ |
5.22
|
$ |
4.82
|
$ |
3.46
|
||||||||||
|
*
|
In
2007, certain assets and liabilities were reclassified to “Assets held for
sale” and “Liabilities associated with assets held for sale” captions in
our consolidated balance sheets. These assets and liabilities are labeled
as ‘current’ to give effect to the short term nature of those assets and
liabilities that were divested in the first quarter of 2008 in connection
with the sale certain of our businesses. We have reclassified 2006
balances for comparative purposes, both on the face of the consolidated
balance sheets, and in the working capital metric above. We have not
restated working capital for 2005 or prior periods, as we did not have
assets and liabilities held for sale prior to 2006, nor are they presented
on the face of the consolidated balance
sheets.
|
We paid a
two-for-one stock split in the form of a 100 percent stock dividend on November
5, 2003. All information above pertaining to 2003 above has been restated to
reflect the stock split.
37
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Boston
Scientific Corporation is a worldwide developer, manufacturer and marketer of
medical devices that are used in a broad range of interventional medical
specialties. Our mission is to improve the quality of patient care and the
productivity of healthcare delivery through the development and advocacy of
less-invasive medical devices and procedures. We accomplish this mission through
the continuing refinement of existing products and procedures and the
investigation and development of new technologies that can reduce risk, trauma,
cost, procedure time and the need for aftercare. Our approach to innovation
combines internally developed products and technologies with those we obtain
externally through our acquisitions and alliances. The growth and success of our
organization is dependent upon the shared values of our people. Our quality
policy, applicable to all employees, is “I improve the quality of patient care
and all things Boston Scientific.” This personal commitment connects our people
with the vision and mission of Boston Scientific.
Our
management’s discussion and analysis (MD&A) begins with an executive summary
that outlines financial highlights of 2007 and identifies 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. We follow this discussion with an examination of the
material changes in our operating results for 2007 as compared to 2006 and for
2006 as compared to 2005. We then provide 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 included in Item
8 of this Form 10-K, and the trends underlying these changes. Finally, the
MD&A provides information on our critical accounting policies.
On April
21, 2006, we consummated our acquisition of Guidant Corporation. With this
acquisition, we have become a major provider in the $10 billion global Cardiac
Rhythm Management (CRM) market, 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 therapies. As a result
of the acquisition, we now manufacture a variety of implantable devices that
monitor the heart and deliver electricity to treat cardiac abnormalities,
including tachycardia (abnormally fast or chaotic heart rhythms), bradycardia
(slow or irregular heart rhythms), and heart failure (the heart’s inability to
pump effectively). These devices include implantable cardioverter defibrillator
(ICD) and pacemaker systems. In addition, we acquired Guidant’s Cardiac Surgery
business, which produces cardiac surgery systems to perform cardiac surgical
ablation, endoscopic vessel harvesting and clampless beating-heart bypass
surgery. We divested the Cardiac Surgery business in a separate transaction in
2008; see Strategic
Initiatives within the Executive Summary that
follows for more information on this and our other business divestitures. We
also now share certain drug-eluting technology with Abbott Laboratories, which
gives us access to a second drug-eluting stent program, and complements our
TAXUS® stent system
program. See Note C
- Acquisitions to our
2007 consolidated financial statements included in Item 8 of this
Form 10-K for further details on the Guidant acquisition and Abbott
transaction.
Our
operating results for the year ended December 31, 2007 include a full year of
results of our CRM and Cardiac Surgery businesses that we acquired from Guidant.
Our operating results for the year ended December 31, 2006 include the results
of the CRM and Cardiac Surgery businesses beginning on the date of acquisition.
We have included supplemental pro forma financial information in Note C – Acquisitions
to our 2007 consolidated financial statements included in Item 8 of this
Form 10-K, which gives effect to the acquisition as though it had occurred
at the beginning of 2006 and 2005.
38
Executive Summary
Financial Highlights and
Trends
Our net
sales in 2007 increased to $8.357 billion from $7.821 billion in 2006,
an increase of $536 million or 7 percent. Our reported net loss for 2007 was
$495 million, or $0.33 per diluted share, on approximately 1.5 billion
weighted-average shares outstanding, as compared to a net loss for 2006 of
$3.577 billion, or $2.81 per diluted share, on approximately 1.3 billion
weighted-average shares outstanding. Our reported results included acquisition-,
divestiture-, litigation- and restructuring-related charges2 (after tax) of $1.092 billion, or $0.73 per
diluted share in 2007, as compared to acquisition-related charges (after tax) of
$4.566 billion, or $3.58 per diluted share, in 2006. Cash provided by
operating activities was $934 million in 2007 as compared to $1.845 billion
in 2006.
The
increase in our net sales for 2007 was driven primarily by our 2006 acquisition
of Guidant. Worldwide sales of our CRM business increased to $2.124 billion from
$1.371 billion in 2006, an increase of $753 million or 55 percent, on an as
reported basis. On a pro forma basis, including the acquired CRM business for
the entire year in 2006, CRM revenue increased $98 million, or five percent. The
increase was a result of growth in the size of the worldwide markets for both
ICD and pacemaker systems. We estimate that the size of the combined worldwide
CRM market increased six percent in 2007, as compared to 2006.
Partially
offsetting increases in sales of our CRM products was a decrease in our coronary
stent system sales. Worldwide sales of our coronary stent systems in 2007 were
$2.027 billion, as compared to $2.506 billion in 2006, a decrease of $479
million or 19 percent. The deterioration was driven by decreases in sales of our
drug-eluting coronary stent systems, attributable primarily to a decline in the
worldwide drug-eluting stent market size. Uncertainty regarding the perceived
risk of late stent thrombosis3 following the use of drug-eluting stents has
resulted in lower procedural volumes and contributed to the overall decline.
During 2007, we successfully launched our TAXUS® Express2Ô drug-eluting
coronary stent system in Japan, and have achieved a leadership position within
the worldwide drug-eluting stent market.
During
2007, worldwide sales from our Endosurgery businesses increased to $1.479
billion from $1.346 billion in 2006, an increase of 10 percent. Further,
our Neuromodulation business generated $317 million in net sales during
2007, as compared to $234 million in 2006, an increase of 36
percent.
At
December 31, 2007, we had total debt of $8.189 billion, cash and cash
equivalents of $1.452 billion and working capital of $2.671 billion. During
2007, we prepaid $750 million of debt and prepaid an additional $200 million in
January 2008. We expect to make a further payment of $425 million before the end
of the first quarter of 2008 and expect to continue to use a significant portion
of our future operating cash flows over the next several years to reduce our
debt obligations.
Strategic
Initiatives
In 2007,
we announced several new initiatives designed to enhance short- and long-term
shareholder value,
|
2
|
In
2007, these charges (after-tax) include: a $553 million charge associated
with the write-down of goodwill in connection with business divestitures;
a $294 million charge associated with on-going patent litigation; $131
million of restructuring-related charges associated with our expense and
head count reduction initiatives; an $84 million charge for in-process
research and development costs; and $30 million in charges related to our
2006 acquisition of Guidant. In 2006, these charges included: $4.477
billion in purchase price adjustments related to Guidant, associated
primarily with a $4.169 billion charge for in-process research and
development costs and a $169 million charge for the step-up value of
Guidant inventory sold; $143 million in other costs related primarily to
the Guidant acquisition; and a $54 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 our
acquisition of TriVascular, Inc.
|
39
including
the restructuring of several of our businesses and the sale of five
non-strategic businesses, as well as significant expense and head count
reductions. Our goal is to better align expenses with revenues, while preserving
our ability to make needed investments in quality, research and development
(R&D), capital and our people that are essential to our long-term success.
We expect these initiatives to help provide better focus on our core businesses
and priorities, which will strengthen Boston Scientific for the future and
position us for increased, sustainable and profitable sales growth. Our plan is
to reduce R&D and selling, general and administrative (SG&A) expenses by
$475 million to $525 million against a $4.1 billion baseline, which represented
our estimated annual R&D and SG&A expenses at the time we committed to
these initiatives in 2007. This range represents the annualized run rate amount
of reductions we expect to achieve as we exit 2008, as the implementation of
these initiatives will take place throughout the year; however, we expect to
realize the majority of these savings in 2008. In addition, we expect to reduce
our R&D and SG&A expenses by an additional $25 million to $50 million in
2009.
Restructuring
In
October 2007, our Board of Directors approved an expense and head count
reduction plan, which we expect will result in the elimination of approximately
2,300 positions worldwide. We are providing affected employees with severance
packages, outplacement services and other appropriate assistance and support.
The plan is intended to bring expenses in line with revenues as a part of our
initiatives to enhance short- and long-term shareholder value. We initiated
activities under the plan in the fourth quarter of 2007 and expect to complete
substantially all of these activities worldwide by the end of
2008. As of December 31, 2007, we had completed more than half of the
anticipated head count reductions. The plan also provides for the restructuring
of several businesses and product franchises in order to leverage resources,
strengthen competitive positions, and create a more simplified and efficient
business model. We expect that the execution of this plan will result in total
costs of approximately $425 million to $450 million. We recorded $205 million of
these costs in the fourth quarter of 2007, and expect to record the remainder
throughout 2008 and into 2009. We are recording these costs primarily as
restructuring charges, with a portion recorded through other lines within our
consolidated statements of operations. Refer to Results of Operations and
Note G - Restructuring
to our 2007 consolidated financial statements included in Item 8 of this Form
10-K for more information on these initiatives.
Divestitures
During
2007, we determined that our Auditory, Vascular Surgery, Cardiac Surgery, Venous
Access and Fluid Management businesses were no longer strategic to our ongoing
operations. Therefore, we initiated the process of selling these businesses in
2007, and completed the sale of these businesses in 2008, as discussed below. We
received gross proceeds of approximately $1.3 billion from these divestitures,
and estimate future tax payments of approximately $350 million associated with
these transactions. The combined 2007 revenues generated from these businesses
was $553 million, or seven percent of our net sales. Approximately 2,000
positions were eliminated in connection with our business
divestitures.
In
January 2008, we completed the sale of a controlling interest in our Auditory
business and drug pump development program to entities affiliated with the
principal former shareholders of Advanced Bionics Corporation for an aggregate
payment of $150 million. In connection with the
sale, we recorded a loss of $367 million (pre-tax) in 2007, attributable
primarily to the write-down of goodwill.
In
January 2008, we completed the sale of our Cardiac Surgery and Vascular Surgery
businesses for $750 million in cash. In connection with the sale, we recorded a
loss of $193 million (pre-tax) in 2007, attributable primarily to the write-down
of goodwill. In addition, we expect to record a tax expense of approximately $50
million in the first quarter of 2008 in connection with the closing of the
transaction.
In
February 2008, we completed the sale of our Fluid Management business and our
Venous Access franchise, previously part of our Oncology business, for $425
million in cash. We expect to record a pre-tax gain of approximately
$230 million during the first quarter of 2008 associated with this
transaction.
40
Refer to
Note E – Assets Held for Sale
to our 2007 consolidated financial statements included in Item 8 of this
Form 10-K for more information regarding these transactions.
In March
2007, we announced our intent to explore the benefits that could be gained from
operating our Endosurgery group as a separately traded public company that would
become a majority-owned subsidiary of Boston Scientific. In July 2007, we
completed our exploration of an IPO of a minority interest in our Endosurgery
group and determined that the group will remain wholly owned by Boston
Scientific.
Monetization of
Investments
During
the second quarter of 2007, we announced our decision to monetize the majority
of our investment portfolio in order to eliminate investments determined to be
non-strategic. Following this decision, in 2007, we monetized several of our
investments in, and notes receivable from, certain publicly traded and privately
held companies. We received total gross proceeds of $243 million in 2007 from
the sale of investments and collections of notes receivable. We intend to
monetize the rest of our non-strategic portfolio investments over the next
several quarters. The total carrying value of our portfolio of equity
investments and notes receivable was $378 million as of December 31,
2007. We believe that the fair value of our individual investments
and notes receivable equals or exceeds their carrying values as of December 31,
2007; however, we could recognize losses as we monetize these investments
depending on the market conditions for these investments at the time of sale and
the net proceeds we ultimately receive. Refer to our Other, net discussion and
Note F – Investments and Notes
Receivable to our 2007 consolidated financial statements included in Item
8 of this Form 10-K for more information on our investment portfolio and
activity.
FDA Warning
Letters
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. In April
2007, following FDA reinspections of our CRM facilities, we resolved the warning
letter and all associated restrictions were removed.
In
January 2006, legacy Boston Scientific received a corporate warning letter from
the FDA notifying us of serious regulatory problems at three of our
facilities and advising us that our corporate-wide corrective action plan
relating to three site-specific warning letters issued to us in 2005 was
inadequate. In order to strengthen our corporate-wide quality controls, we
launched Project Horizon, which has resulted in significant incremental spending
on and the reallocation of internal employee and management resources to quality
initiatives. It has also resulted in adjustments to the launch schedules of
certain products and the decision to discontinue certain other product lines
over time.
We
believe we have identified solutions to the quality system issues cited by the
FDA and continue to make progress in transitioning our organization to implement
those solutions. We engaged a third party to audit our enhanced quality systems
in order to assess our corporate-wide compliance prior to reinspection by the
FDA. We completed substantially all of these third-party audits during 2007 and,
in February 2008, the FDA commenced its reinspection of certain of our
facilities. We believe that these reinspections represent a critical step toward
the resolution of the corporate warning letter.
In
addition, in August 2007, we received a warning letter from the FDA regarding
the conduct of clinical investigations associated with our TriVascular AAA
program. We are taking corrective action and have made certain commitments to
the FDA regarding the conduct of our clinical trials. We terminated the
TriVascular AAA program in 2006 and do not believe this warning letter will have
an impact on the timing of the resolution of our corporate warning
letter.
There can
be no assurances regarding the length of time or cost it will take us to resolve
these quality issues to our satisfaction and to the satisfaction of the
FDA. Our inability to resolve these quality issues in a timely
41
manner
may further delay product launch schedules, including the anticipated U.S.
launch of our next-generation drug-eluting stent system, the TAXUS® Liberté®,
which may weaken our competitive position in the market. If our remedial actions
are not satisfactory to the FDA, we may need to devote additional financial and
human resources to our efforts, and the FDA may take further regulatory
actions.
Outlook
Coronary Stent
Business
Coronary
stent revenue represented approximately 24 percent of our consolidated net sales
for 2007, as compared to 32 percent in 2006, as a result of our acquisition of
Guidant, which significantly expanded our product offerings, as well as a
decline in our coronary stent system sales in 2007. We estimate that the
worldwide coronary stent market approximated $5.0 billion in 2007, as
compared to approximately $6.0 billion in 2006, and estimate that drug-eluting
stents represented approximately 80 percent of the dollar value of
worldwide coronary stent market sales in 2007, as compared to 90 percent in
2006. Coronary stent market size is driven primarily by the number of
percutaneous coronary intervention (PCI) procedures performed; the number of
devices used per procedure; average drug-eluting stent selling prices; and the
drug-eluting stent penetration rate (a measure of the mix between bare-metal and
drug-eluting stents used across procedures). Uncertainty regarding the efficacy
of drug-eluting stents, as well as the increased perceived risk of late stent
thrombosis following the use of drug-eluting stents, has contributed to a
decline in the worldwide drug-eluting stent market size. However, recent data
addressing this risk and supporting the safety of drug-eluting stent systems
could positively affect the size of the drug-eluting stent market, as referring
cardiologists regain confidence in this technology.
In
October 2006, we received CE mark approval to begin marketing our PROMUSÔ everolimus-eluting
coronary stent system, which is a private-labeled XIENCEÔ V drug-eluting
stent system supplied to us by Abbott. Under the terms of our supply arrangement
with Abbott, the profit margin of a PROMUS stent system is significantly lower
than that of our TAXUS stent system. Therefore, an increase in PROMUS stent
system revenue relative to our total drug-eluting stent revenue could have
a negative impact on our profit margins. We will incur incremental costs and
expend incremental resources in order to develop and commercialize additional
products utilizing everolimus-eluting stent technology and to support an
internally developed and manufactured everolimus-eluting stent system in the
future. We expect that this stent system will have profit margins more
comparable to our TAXUS stent system. See the Purchased Research and
Development section for further discussion.
In June
2007, Abbott submitted the final module of a pre-market approval (PMA)
application to the FDA seeking approval in the U.S. for both the XIENCE V and
PROMUS stent systems. In November 2007, the FDA advisory panel reviewing
Abbott’s PMA submission voted to recommend the stent systems for
approval. Following FDA approval, which Abbott is expecting in the
first half of 2008, we plan to launch the PROMUS stent system in the
U.S.
The
following are the components of our worldwide coronary stent system
sales:
|
(in
millions)
|
Year Ended
December 31,
2007
|
Year Ended
December 31,
2006
|
||||||||||||||||||||||
|
U.S.
|
International
|
Total
|
U.S.
|
International
|
Total
|
|||||||||||||||||||
|
Drug-eluting
|
$ | 1,006 | $ | 782 | $ | 1,788 | $ | 1,561 | $ | 797 | $ | 2,358 | ||||||||||||
|
Bare-metal
|
104 | 135 | 239 | 52 | 96 | 148 | ||||||||||||||||||
| $ | 1,110 | $ | 917 | $ | 2,027 | $ | 1,613 | $ | 893 | $ | 2,506 | |||||||||||||
During
2007, sales of our TAXUS® stent system in the U.S. declined $555 million or 36
percent, as compared to the prior year, due to a decline in market size.
Decreases in drug-eluting stent penetration rates, as well as
42
decreases
in PCI procedural volume contributed to an overall reduction in the U.S.
coronary stent market size. Drug-eluting stent penetration rates were 62 percent
exiting 2007, as compared to 73 percent exiting 2006. Penetration rates
decreased throughout 2007, but appear to have stabilized at approximately 62
percent during the fourth quarter of 2007, which was largely consistent with the
third quarter average penetration rate of 63 percent. We estimate that the
number of PCI procedures performed in the U.S. in 2007 decreased eight percent,
as compared to 2006. Despite the decrease in the size of the U.S. drug-eluting
stent market, we remain the market leader with 55 percent market share for 2007.
However, we expect that there will be increased pressure on our U.S.
drug-eluting stent system sales due to new competitive launches. Until February
2008, the TAXUS stent system was one of only two drug-eluting stent products in
the U.S. market. In February, however, an additional competitor entered the U.S.
drug-eluting stent market. Our share of this market, as well as unit prices, are
expected to be negatively impacted as additional competitors enter the U.S.
drug-eluting stent market, including Abbott’s anticipated launch of XIENCEÔ V in the first half
of 2008.
During
2007, our international drug-eluting stent system net sales decreased $15
million, or two percent, as compared to 2006, due primarily to an overall
decline in the size of the international drug-eluting stent market. Sales of our
drug-eluting stent systems in our Europe and Inter-Continental markets were
negatively impacted by declines in market size as a result of decreases in
drug-eluting stent penetration rates and decreased PCI procedural volume, as
compared to 2006, driven primarily by continued concerns regarding safety and
efficacy. This decline was offset partially by the successful launch of our
TAXUS® Express2Ô drug-eluting
coronary stent system in Japan in May 2007.
Historically,
the worldwide coronary stent market has been dynamic and highly competitive with
significant market share volatility. In addition, in the ordinary course of our
business, we conduct and participate in numerous clinical trials with a variety
of study designs, patient populations and trial end points. Unfavorable or
inconsistent clinical data from existing or future clinical trials conducted by
us, by our competitors or by third parties, or the market’s perception of this
clinical data, may adversely impact our position in and share of the
drug-eluting stent market and may contribute to increased volatility in the
market. In addition, the FDA has informed stent manufacturers of new
requirements for clinical trial data for PMA applications and post-market
surveillance studies for drug-eluting stent products, which could affect our new
product launch schedules and increase the cost of product approval and
compliance.
We
believe that we can maintain our leadership position within the worldwide
drug-eluting stent market for a variety of reasons, including:
|
·
|
the
broad and consistent long-term results of our TAXUS clinical trials,
including up to five years of clinical follow
up;
|
|
·
|
the
performance benefits of our current and future
technology;
|
|
·
|
the
strength of our pipeline of drug-eluting stent products, including
opportunities to expand indications for use through FDA review of existing
and additional randomized trial data in extended use
subsets;
|
|
·
|
our
overall position in the worldwide interventional medicine market and our
experienced interventional cardiology sales
force;
|
|
·
|
our
sales, clinical, marketing and manufacturing capabilities;
and
|
|
·
|
our two
drug-eluting stent platform strategy, including our TAXUS®
paclitaxel-eluting and our PROMUS™ everolimus-eluting coronary stent
systems.
|
However,
a further decline in revenues from our drug-eluting stent systems could continue
to have a significant adverse impact on our operating results and operating cash
flows. The most significant variables that may impact the size of the
drug-eluting stent market and our position within this market
include:
43
|
·
|
the
entry of additional competitors into the market, including the recent
approval of a competitive product in the
U.S.;
|
|
·
|
physician
and patient confidence in our technology and attitudes toward drug-eluting
stents, including expected abatement of prior concerns regarding the risk
of late stent thrombosis;
|
|
·
|
drug-eluting
stent penetration rates, the overall number of PCI procedures performed,
average number of stents used per procedure, and declines in average
selling prices of drug-eluting stent
systems;
|
|
·
|
variations
in clinical results or perceived product performance of our or our
competitors’ products;
|
|
·
|
delayed
or limited regulatory approvals and unfavorable reimbursement
policies;
|
|
·
|
the
outcomes of intellectual property
litigation;
|
|
·
|
our
ability to launch next-generation products and technology features,
including our TAXUS® Liberté® paclitaxel-eluting
coronary stent
system and our PROMUSÔ
everolimus-eluting coronary stent system, in the U.S.
market;
|
|
·
|
our
ability to retain key members of our sales force and other key personnel;
and
|
|
·
|
changes
in FDA clinical trial data and post-market surveillance requirements and
the associated impact on new product launch schedules and the cost of
product approvals and compliance.
|
CRM
Business
CRM
revenue represented approximately 25 percent of our consolidated net sales for
2007, as compared to approximately 18 percent in 2006, or 24 percent on a pro
forma basis, including the CRM business for the entire year in 2006. We estimate
that the worldwide CRM market approximated $10.0 billion in 2007, as compared to
approximately $9.5 billion in 2006, and estimate that U.S. ICD system sales
represented approximately 40 percent of the worldwide CRM market in 2007, as it
did in 2006.
The
following are the components of our worldwide CRM sales:
|
(in
millions)
|
Year Ended
December 31,
2007
|
Year Ended
December 31,
2006
|
||||||||||||||||||||||
|
U.S.
|
International
|
Total
|
U.S.
|
International
|
Total
|
|||||||||||||||||||
|
ICD
systems
|
$ | 1,053 | $ | 489 | $ | 1,542 | $ | 1,053 | $ | 420 | $ | 1,473 | ||||||||||||
|
Pacemaker
systems
|
318 | 264 | 582 | 305 | 248 | 553 | ||||||||||||||||||
| $ | 1,371 | $ | 753 | $ | 2,124 | $ | 1,358 | $ | 668 | $ | 2,026 | |||||||||||||
|
Less:
Jan 1 - Apr 20 net sales
|
655 | |||||||||||||||||||||||
|
CRM
sales, as reported
|
$ | 1,371 | ||||||||||||||||||||||
On a pro
forma basis, our U.S. sales of ICD systems for 2007 remained flat with 2006,
with both the market size and our share of the market substantially unchanged.
Our international ICD system sales increased 16 percent in 2007, as compared to
2006, on a pro forma basis, due primarily to an increase in market size. We also
experienced year-over-year growth, on a pro forma basis, in pacemaker system
sales in both the U.S. and
44
international
markets. However, a field action initiated in 2007 by one of our competitors may
have an adverse impact on the overall size of the CRM market. In addition, our
net sales and market share in Japan were negatively impacted by a decision made
in 2007 by our CRM distributor in that country to no longer distribute our CRM
products. As a result, we are currently moving to a direct sales model in Japan
and, until we fully implement this model, our net sales and market share in
Japan may be negatively impacted.
Worldwide
CRM market growth rates in 2007 and 2006, including the U.S. ICD market, were
below those experienced in prior years, resulting primarily from previous field
actions in the industry and from a lack of new indications for use. While we
expect that growth rates in the worldwide CRM market will improve over time,
there can be no assurance that these markets will return to their
historical growth rates or that we will be able to increase net sales in a
timely manner, if at all. The most significant variables that may impact the
size of the CRM market and our position within that market include:
|
·
|
our
ability to launch next-generation products and technology features in a
timely manner;
|
|
·
|
our
ability to re-establish the trust and confidence of the implanting
physician community, the referring physician community and prospective
patients in our technology;
|
|
·
|
future
product field actions or new physician advisories by us or our
competitors;
|
|
·
|
successful
conclusion and positive outcomes of on-going clinical trials that may
provide opportunities to expand indications for
use;
|
|
·
|
variations
in clinical results, reliability or product performance of our and our
competitors’ products;
|
|
·
|
delayed
or limited regulatory approvals and unfavorable reimbursement
policies;
|
|
·
|
our
ability to retain key members of our sales force and other key
personnel;
|
|
·
|
new
competitive launches;
|
|
·
|
declines
in average selling prices and the overall number of procedures performed;
and
|
|
·
|
the
outcome of legal proceedings related to our CRM
business.
|
In April
2007, following FDA reinspections of our CRM facilities, we resolved the warning
letter issued to Guidant in December 2005 and all associated restrictions
were removed. We believe the FDA’s decision is a crucial element in our ongoing
efforts to rebuild trust and restore confidence in our CRM product offerings,
and has allowed us to resume our new product cadence. Following the resolution
of the warning letter, we received various FDA approvals that had been pending
and have since launched several new CRM products.
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 coronary
stent market. See Note L -
Commitments and Contingencies to our 2007 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
45
externally
through acquisitions and alliances. Our research and development program is
focused largely on the development of next-generation and novel technology
offerings across multiple programs and divisions. We now have access to a second
drug-eluting stent program, which complements our existing TAXUS® stent system
program. We expect to continue to invest in our paclitaxel drug-eluting stent
program, along with our internally developed and manufactured everolimus-eluting
stent program, to continue to sustain our leadership position in the worldwide
drug-eluting stent market. During 2008, we expect to incur incremental capital
expenditures and research and development expenses as a result of our two
drug-eluting stent programs. We successfully launched our next-generation
drug-eluting stent product, the TAXUS® Liberté® stent system, during 2005 in our
Europe and Inter-Continental markets, and expect to launch the product in the
U.S. in the second half of 2008, subject to regulatory approval. In addition, we
expect to continue to invest in our CRM technologies, including our LATITUDE®
Patient Management System, a technology that enables physicians to monitor
device performance remotely while patients remain in their homes. In October
2006, the FDA approved expansion of our LATITUDE system to be used for remote
monitoring in certain existing ICD systems and cardiac resynchronization
defibrillator (CRT-D) systems. In addition, we will continue to invest in our
next-generation pulse generator platform acquired with Guidant. We recently
received CE Mark approval for our next-generation COGNIS™ CRT-D and TELIGEN™ ICD
devices utilizing this technology and expect to launch these products in the
U.S. in the second half of 2008, subject to regulatory approval. 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 approvals or gain market
acceptance. A delay in the development or approval of these technologies may
adversely impact our future growth.
Our
acquisitions 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 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 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.
We have
entered a significant number of alliances with both privately held and publicly
traded companies. Many of these alliances involve equity investments and some
give us the option to acquire the other company or its assets in the future. We
enter these alliances to broaden our product technology portfolio and to
strengthen and expand our reach into existing and new markets. During 2007, we
began the process of monetizing certain investments and alliances no longer
determined to be strategic (see the Strategic Initiatives
section). While we believe our remaining strategic investments are within
attractive markets with an outlook for sustained growth, the full benefit of
these alliances is highly 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.
While we
believe that the size of drug-eluting stent and CRM markets will increase above
existing levels, there can be no assurance as to the timing or extent of this
recovery. In 2008, we will continue to examine and, if necessary, reprioritize
our internal research and development project portfolio and our external
investment portfolio 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 these reprioritization activities may be used to reduce debt or
may be reinvested in other research and development projects or other
operational initiatives.
46
Reimbursement and
Funding
Our
products are purchased principally by hospitals, physicians and other healthcare
providers worldwide that typically bill various 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 independently determined assessment criteria.
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. There is no way of
predicting the outcome of these reimbursement decisions, nor their impact on our
operating results.
International
Markets
International
markets, including Japan, are also affected by economic pressure to contain
reimbursement levels and healthcare costs. Our 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. Initiatives to limit the growth of healthcare costs,
including price regulation, are under way 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. We expect these practices to put increased pressure on reimbursement
rates in these markets.
In
addition, most international jurisdictions have adopted regulatory approval and
periodic renewal requirements for medical devices, and we must comply with these
requirements in order to market our products in these jurisdictions. Further,
some emerging markets rely on the FDA’s Certificate for Foreign government (CFG)
in lieu of their own regulatory approval requirements. Our FDA corporate warning
letter prevents our ability to obtain CFGs; therefore, our ability to market new
products or renew marketing approvals in countries that rely on CFGs will
continue to be impacted until the corporate warning letter is resolved. Our
limited ability to market our full line of existing products and to launch new
products within these jurisdictions could have a material adverse impact on our
business.
Results of
Operations
Net
Sales
The
following table provides our worldwide net sales by region and the relative
change on an as reported and constant currency basis:
47
|
2007 versus
2006
|
2006 versus
2005
|
|||||||||||||||||||||||||||
|
As
Reported
|
Constant
|
As Reported
|
Constant
|
|||||||||||||||||||||||||
|
Currency
|
Currency
|
Currency
|
Currency
|
|||||||||||||||||||||||||
|
(in
millions)
|
2007
|
2006
|
2005
|
Basis
|
Basis
|
Basis
|
Basis
|
|||||||||||||||||||||
|
United
States
|
$ | 4,923 | $ | 4,840 | $ | 3,852 | 2 | % | 2 | % | 26 | % | 26 | % | ||||||||||||||
|
Europe
|
1,807 | 1,576 | 1,204 | 15 | % | 5 | % | 31 | % | 29 | % | |||||||||||||||||
|
Asia
Pacific
|
1,176 | 948 | 866 | 24 | % | 23 | % | 9 | % | 13 | % | |||||||||||||||||
|
Inter-Continental
|
451 | 457 | 361 | (1 | %) | (6 | %) | 27 | % | 23 | % | |||||||||||||||||
|
International
|
3,434 | 2,981 | 2,431 | 15 | % | 9 | % | 23 | % | 22 | % | |||||||||||||||||
|
Worldwide
|
$ | 8,357 | $ | 7,821 | $ | 6,283 | 7 | % | 5 | % | 24 | % | 24 | % | ||||||||||||||
The
following table provides our worldwide net sales by division and the relative
change on an as reported basis:
|
(in
millions)
|
2007
|
2006
|
2005
|
2007 versus
2006
|
2006 versus
2005
|
|||||||||||||||
|
Interventional
Cardiology
|
$ |
3,117
|
$ |
3,612
|
$ |
3,783
|
(14 | %) | (5 | %) | ||||||||||
|
Peripheral
Interventions/ Vascular Surgery
|
627
|
666
|
715
|
(6 | %) | (7 | %) | |||||||||||||
|
Electrophysiology
|
147
|
134
|
132
|
10 | % | 2 | % | |||||||||||||
|
Neurovascular
|
352
|
326
|
277
|
8 | % | 18 | % | |||||||||||||
|
Cardiac
Surgery
|
194
|
132
|
N/A
|
47 | % |
N/A
|
||||||||||||||
|
Cardiac
Rhythm Management
|
2,124
|
1,371
|
N/A
|
55 | % |
N/A
|
||||||||||||||
|
Cardiovascular
|
6,561
|
6,241
|
4,907
|
5 | % | 27 | % | |||||||||||||
|
Oncology
|
233
|
221
|
207
|
5 | % | 7 | % | |||||||||||||
|
Endoscopy
|
843
|
754
|
697
|
12 | % | 8 | % | |||||||||||||
|
Urology
|
403
|
371
|
324
|
9 | % | 15 | % | |||||||||||||
|
Endosurgery
|
1,479
|
1,346
|
1,228
|
10 | % | 10 | % | |||||||||||||
|
Neuromodulation
|
317
|
234
|
148
|
36 | % | 58 | % | |||||||||||||
|
Worldwide
|
$ |
8,357
|
$ |
7,821
|
$ |
6,283
|
7 | % | 24 | % | ||||||||||
We manage
our international operating regions and divisions on a constant currency basis,
and we manage market risk from currency exchange rate changes at the corporate
level. The relative change on a constant currency basis by division approximated
the change on an as reported basis. To calculate revenue growth rates that
exclude the impact of currency exchange, we convert actual current-period net
sales from local currency to U.S. dollars using constant currency exchange
rates. The regional constant currency growth rates in the table above can be
recalculated from our net sales by reportable segment as presented in Note P – Segment Reporting to
our 2007 consolidated financial statements included in Item 8 of this Form 10-K.
Growth rates are based on actual, non-rounded amounts and may not recalculate
precisely.
U.S. Net Sales
In 2007,
our U.S. net sales increased $83 million, or two percent, as compared to
2006. The increase related primarily to increases in U.S. CRM and Cardiac
Surgery business sales of $502 million due to a full year of consolidated
operations in 2007, whereas the results for these businesses were included only
following the April 21, 2006 acquisition date in 2006. In addition, we achieved
year-over-year U.S. sales growth of $64 million in our Endosurgery businesses
and $65 million in our Neuromodulation business. Offsetting these increases was
a decline in U.S. net sales of our TAXUS® drug-eluting stent system of $555
million, due primarily to a decrease in the size of the U.S. drug-eluting stent
market. This decrease was driven principally by continued declines in
drug-eluting stent penetration rates resulting from ongoing concerns regarding
the safety and efficacy of drug-eluting stents. Our U.S. drug-eluting stent
market share was stable during both
48
2007 and
2006; we maintained continuous market share of at least 53 percent throughout
those periods. See the Outlook section for a more
detailed discussion of both the drug-eluting stent and CRM markets and our
position within those markets.
In 2006,
our U.S. net sales increased $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 CRM and Cardiac Surgery businesses acquired in April
2006. In addition, we achieved year-over-year U.S. sales growth of
$83 million in our Endosurgery businesses and $75 million in our
Neuromodulation business. Offsetting these increases were declines in U.S. net
sales of our TAXUS drug-eluting stent system of $202 million, due principally to
a decrease in the size of the U.S. drug-eluting stent market, and a decline in
our average market share in 2006, as compared to 2005. In addition, decreases in
net sales of approximately $70 million were attributable to the first quarter
2006 expiration of our agreement to distribute certain third-party guidewire and
sheath products.
International Net
Sales
In 2007,
our international net sales increased $453 million, or 15 percent, as
compared to 2006. The increase related partially to an increase in net sales
from our CRM and Cardiac Surgery businesses of $210 million, due to a full year
of consolidated results in 2007, and $85 million associated with increased sales
of both ICD and pacemaker systems. In addition, net sales of our drug-eluting
stent systems in our Asia Pacific region increased $131 million in 2007, as
compared to 2006, due primarily to the May 2007 launch of our TAXUS®
Express2Ô coronary stent
system in Japan. The favorable impact of foreign currency fluctuations also
contributed $180 million to our sales growth in 2007. Offsetting these increases
were declines in net sales of our drug-eluting stent systems in our Europe and
Inter-Continental markets by $145 million in 2007, as compared to 2006, due
primarily to an overall decline in the size of the drug-eluting stent market as
well as market share declines in these regions, as additional competitive
products entered the market. See the Outlook section for a more
detailed discussion of both the drug-eluting stent and CRM markets and our
position within those markets.
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 CRM and Cardiac Surgery businesses
acquired in April 2006. The remainder of the increase in our net sales in these
markets was due to growth in various product franchises, including $35 million
in net sales from our Endosurgery businesses, as well as $27 million of sales
growth from our Neurovascular business.
Gross
Profit
In 2007,
our gross profit was $6.015 billion, as compared to $5.614 billion in 2006, an
increase of $401 million or seven percent. As a percentage of net sales, our
gross profit increased slightly to 72.0 percent for 2007, as compared to 71.8
percent for 2006. For 2006, our gross profit was $5.614 billion, as compared to
$4.897 billion for 2005. As a percentage of net sales, our gross profit
decreased to 71.8 percent for 2006, as compared to 77.9 percent for 2005. The
following is a reconciliation of our gross profit percentages from 2005 to 2006
and 2006 to 2007:
|
Year
Ended
|
||||||||
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Gross
profit - prior year
|
71.8 | % | 77.9 | % | ||||
|
Inventory
step-up charge in 2006
|
3.4 | % | (3.8 | )% | ||||
|
Shifts
in product mix
|
(1.8 | )% | (0.8 | )% | ||||
|
Impact
of lower production volumes
|
(0.8 | )% | ||||||
|
Impact
of period expenses
|
(0.8 | )% | (2.0 | )% | ||||
|
All
other
|
0.2 | % | 0.5 | % | ||||
|
Gross
profit - current year
|
72.0 | % | 71.8 | % | ||||
49
Included
in cost of products sold for 2006 was an adjustment of $267 million,
representing the step-up value of acquired Guidant inventory sold during the
year. There were no amounts included in our 2007 cost of products
sold related to the inventory step-up and, as of December 31, 2007, we had no
step-up value remaining in inventory. Factors contributing to a shift in our
product sales mix toward lower margin products in 2007 included a decrease in
sales of our higher margin TAXUS® drug-eluting stent system and an increase in
sales of our CRM products, which generally have lower gross profit
margins. In addition, we have manufactured lower volumes of certain
of our products, including our drug-eluting stent systems, which has resulted in
higher unit costs during 2007. Our period expenses included, among
other items, increased charges for scrapped inventory in 2007 as compared to
2006.
Included
in cost of products sold for 2006 was the $267 million inventory step-up
adjustment discussed above, whereas there were no such amounts included in our
2005 cost of products sold. In addition, increases in period
expenses, including costs associated with Project Horizon, contributed to a
decline in our gross profit percentage for 2006, as compared to 2005. Further,
our 2006 gross profit percentage was negatively impacted as compared to 2005 due
to shifts in our product sales mix toward lower margin products, including a
decrease in sales of our TAXUS drug-eluting stent system and an increase in
sales of our CRM products.
Operating
Expenses
The
following table provides a summary of our operating expenses, excluding
purchased research and development, restructuring charges, litigation-related
charges and losses on assets held for sale:
|
2007
|
2006
|
2005
|
|||||||
|
(in
millions)
|
$
|
% of Net
Sales
|
$
|
% of Net
Sales
|
$
|
% of Net
Sales
|
|||
|
Selling,
general and administrative expenses
|
2,909
|
34.8
|
2,675
|
34.2
|
1,814
|
28.9
|
|||
|
Research
and development expenses
|
1,091
|
13.1
|
1,008
|
12.9
|
680
|
10.8
|
|||
|
Royalty
expense
|
202
|
2.4
|
231
|
3.0
|
227
|
3.6
|
|||
|
Amortization
expense
|
641
|
7.7
|
530
|
6.8
|
152
|
2.4
|
|||
Selling, General and Administrative
(SG&A) Expenses
In 2007,
our SG&A expenses increased by $234 million, or nine percent, as compared to
2006. As a percentage of our net sales, SG&A expenses increased slightly to
34.8 percent in 2007 from 34.2 percent in 2006. The increase in our SG&A
expenses related primarily to: $266 million in incremental SG&A expenditures
associated with a full year of consolidated CRM and Cardiac Surgery operations,
offset partially by decreases in spending attributable to planned expense
reductions initiated in the fourth quarter of 2007. Refer to the Strategic Initiatives section
for more discussion of these expense reduction initiatives.
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 in 2005. The increase in our
SG&A expenses related primarily to: $670 million in expenditures associated
with CRM and Cardiac Surgery; $65 million of acquisition-related costs
associated primarily with certain Guidant integration and retention
programs; $63 million due primarily to increased head count attributable to the
expansion of our sales force within our international regions and
Neuromodulation business; and $55 million in incremental stock-based
compensation expense associated with the adoption of Statement No. 123(R), Share-Based
Payment. Refer to Note N - Stock Ownership Plans
to our 2007 consolidated financial statements included in Item 8 of this
Form 10-K for a more detailed discussion of our adoption of Statement No.
123(R).
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 2007, our R&D
expenses increased by $83 million, or 8 percent, as
50
compared
to 2006. As a percentage of our net sales, R&D expenses increased marginally
to 13.1 percent in 2007 from 12.9 percent in 2006. The increase
related primarily to $142 million in incremental R&D expenditures associated
with a full year of consolidated CRM and Cardiac Surgery operations, offset
partially by lower spending of approximately $37 million
associated with the cancellation of our Endovations single-use endoscope R&D
program. During the second quarter of 2007, we determined that our
Endovations system would not be a commercially viable product and terminated the
program. In addition, our 2006 R&D expenses included approximately $30
million in costs related to the cancellation of the TriVascular AAA stent-graft
program. See the Purchased
Research and Development section for further discussion regarding the
cancellation of this program. We do not expect these program cancellations
to materially impact our future operations or cash flows.
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
related primarily to: the inclusion of $270 million in R&D expenditures
associated with our CRM and Cardiac Surgery businesses; 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.
Royalty Expense
In 2007,
our royalty expense decreased by $29 million, or 13 percent, as compared to
2006, due primarily to lower sales of our TAXUS® drug-eluting stent system. As a
percentage of our net sales, royalty expense decreased to 2.4 percent from 3.0
percent for 2006, due to shifts in our sales mix toward products with lower
royalties. Royalty expense attributable to sales of our TAXUS stent system
decreased $48 million as compared to 2006, due to a decrease in TAXUS stent
system sales. Offsetting this decrease was an increase in royalty expense
attributable to CRM and Cardiac Surgery products of $13 million, due to a full
year of consolidated results.
In 2006,
our royalty expense increased by $4 million, or two percent, as
compared to 2005. The increase was due to $25 million of royalty expense
associated with CRM and Cardiac Surgery products. This increase was offset
partially by a decrease in royalty expense attributable to sales of our TAXUS
stent system by $20 million for 2006 as compared to 2005, due primarily to
a decrease in TAXUS stent system sales. As a percentage of net sales, royalty
expense decreased to 3.0 percent in 2006 from 3.6 percent in 2005, due
primarily to the inclusion of net sales from our CRM and Cardiac Surgery
products, which on average have a lower royalty cost relative to legacy Boston
Scientific products.
Amortization
Expense
In 2007,
our amortization expense increased by $111 million, or 21 percent, as compared
to 2006. As a percentage of our net sales, amortization expense increased to 7.7
percent in 2007 from 6.8 percent in 2006. The increase in our amortization
expense related primarily to $147 million of incremental amortization associated
with intangible assets obtained as part of the Guidant acquisition, due to a
full year of amortization. In addition, amortization expense included $21
million attributable to the write-off of intangible assets associated with our
acquisition of Advanced Stent Technologies (AST), due to our decision to suspend
further significant funding of R&D with respect to the PetalÔ bifurcation
stent. We do not expect this decision to materially impact our future
operations or cash flows. These increases were offset by the inclusion in 2006
of the write-off of intangible assets of: $23 million attributable to the
cancellation of the TriVascular AAA program, $21 million associated with
developed technology obtained as part of our 2005 acquisition of Rubicon Medical
Corporation, and $12 million associated with our Real-time Position Management®
System (RPM)Ô
technology.
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.
51
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; and $12 million for the write-off of the intangible
assets associated with our 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 cease development of the first generation of the
technology and concentrate resources on the development and commercialization of
the next-generation product.
Purchased Research and
Development
In 2007,
we recorded $85 million of purchased research and development, including $75
million associated with our acquisition of Remon Medical Technologies, Inc., $13
million resulting from the application of equity method accounting for one of
our strategic investments, and $12 million associated with payments made for
certain early-stage CRM technologies. Additionally, in June 2007, we terminated
our product development agreement with Aspect Medical Systems relating to brain
monitoring technology that Aspect has been developing to aid the diagnosis and
treatment of depression, Alzheimer’s disease and other neurological conditions.
As a result, we recognized a credit to purchased research and development of
approximately $15 million during 2007, representing future payments that we
would have been obligated to make prior to the termination of the agreement. We
do not expect the termination of the agreement to impact our future operations
or cash flows materially.
The $75
million of in-process research and development acquired with Remon consists of a
pressure-sensing system development project, which will be combined with our
existing CRM devices. As of December 31, 2007, we estimate that the total cost
to complete the development project is between $75 million and $80 million. We
expect to launch devices using pressure-sensing technology in 2013 in Europe and
certain other international countries, and in the U.S. in 2016, subject to
regulatory approval. We expect material net cash inflows from such products to
commence in 2016, following the launch of this technology in the
U.S.
In 2006,
we recorded $4.119 billion of purchased research and development, including a
charge of approximately $4.169 billion associated with the in-process research
and development obtained in conjunction with the Guidant acquisition; a credit
of $67 million resulting primarily from the reversal of accrued contingent
payments due to the cancellation of the TriVascular AAA program; and an expense
of $17 million resulting primarily from the application of equity method
accounting for our investment in EndoTex Interventional Systems,
Inc.
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 $540 million for drug-eluting stent technology shared
with Abbott. The purchased research and development value associated with the
Guidant acquisition also includes $369 million representing the estimated fair
value of the potential milestone payments of up to $500 million that we may
receive from Abbott upon its receipt of regulatory approvals for certain
products. 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 had no
alternative future use as of the acquisition date. We will recognize the
milestone payments, if received, as a gain in our financial statements at the
time of receipt.
The most
significant purchased research and development projects acquired from Guidant
include the next-generation CRM pulse generator platform and rights to the
everolimus-eluting stent technology that we share with Abbott. The
next-generation pulse generator platform incorporates 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 families, including ICD systems,
cardiac resynchronization therapy (CRT) devices and pacemaker systems, to treat
electrical dysfunction in the heart. The next-generation products using this
platform include the COGNISÔ CRT-D
52
device,
the TELIGENÔ
ICD device and the INGENIOÔ pacemaker system.
During the first quarter of 2008, we received CE Mark approval for our COGNIS
CRT-D device, which includes defibrillation capability, and the TELIGEN ICD
device, and expect a full European launch by the end of the second quarter of
2008. We expect a U.S. launch of the COGNIS and TELIGEN devices in the second
half of 2008, following regulatory approval. We expect to launch the INGENIO
device in both Europe and the U.S. in the second half of 2010. As of December
31, 2007, we estimate that the total cost to complete the COGNIS and TELIGEN
technology is between $25 million and $35 million, and the cost to complete the
INGENIO technology is between $30 million and $35 million. We expect material
net cash inflows from the COGNIS and TELIGEN devices to commence in the second
half of 2008 and material net cash inflows from the INGENIO device to commence
in the second half of 2010.
The $540
million attributable to 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 the PROMUS™
everolimus-eluting coronary stent system, which is a private-labeled XIENCEÔ V drug-eluting
stent system supplied to us by Abbott, in certain European countries. In 2007,
we expanded our launch in Europe, as well as in key countries in other regions.
In June 2007, Abbott submitted the final module of a pre-market approval (PMA)
application to the FDA seeking approval in the U.S. for both the XIENCE V and
PROMUS stent systems. In November 2007, the FDA advisory panel reviewing
Abbott’s PMA submission voted to recommend the stent systems for
approval. Following FDA approval, which Abbott is expecting in the
first half of 2008, we plan to launch the PROMUS stent system in the U.S. We
expect to launch an internally developed and manufactured next-generation
everolimus-based stent in Europe in late 2009 or early 2010 and in the U.S. in
late 2012 or early 2013. We expect that material net cash inflows from our
internally developed and manufactured everolimus-based drug-eluting stent will
commence in 2013, following its approval in the U.S. As of December 31, 2007, we
estimate that the cost to complete our internally manufactured next-generation
everolimus-eluting stent technology project is between $200 million and $250
million.
In 2005,
we recorded $276 million of purchased research and development consisting of
$130 million relating to our acquisition of TriVascular, $73 million relating to
our acquisition of AST, $45 million relating to our acquisition of Rubicon, and
$3 million relating to our acquisition of CryoVascular. In addition, we recorded
$25 million of purchased research and development in conjunction with entering
the product development agreement with Aspect.
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 2006, management cancelled the TriVascular AAA stent-graft
program. In addition, in connection with our expense and head count reduction
plan, in 2007, we decided to suspend further significant funding of research and
development associated with the Petal stent project and may or may
not decide to pursue its completion. We do not expect these program
cancellations and related write-downs to impact our future operations or cash
flows materially. In connection with the cancellation of the TriVascular AAA
program, we recorded $67 million credit to purchased research and development in
2006, representing the reversal of our accrual for contingent payments recorded
in the initial purchase accounting.
Restructuring
In 2007,
we recorded $176 million of restructuring charges. In addition, we
recorded $29 million of expenses within other lines of our consolidated
statements of operations related to our restructuring initiatives. In October
2007, our Board of Directors approved, and we committed to, an expense and head
count reduction plan, which will result in the elimination of approximately
2,300 positions worldwide. We are providing affected employees with severance
packages, outplacement services and other appropriate assistance and
support. As of December 31, 2007, we had completed more than half of
the anticipated head count reductions. The plan is intended to bring
expenses in line with revenues as part of our initiatives to enhance short-
and long-term shareholder value. Key activities under the plan include the
restructuring of several businesses and product franchises in order to leverage
resources, strengthen competitive positions, and create a more simplified and
efficient business model; the elimination, suspension or reduction of
53
spending
on certain R&D projects; and the transfer of certain production lines from
one facility to another. We initiated these activities in the fourth quarter of
2007 and expect to be substantially completed worldwide by the end of
2008.
We expect
that the execution of this plan will result in total pre-tax expenses of
approximately $425 million to $450 million. We expect the plan to
result in cash outlays of approximately $400 million to $425
million. The following table provides a summary of our estimates of
total costs associated with the plan by major type of cost:
|
Type
of cost
|
Total
amount expected to be incurred
|
|
Termination
benefits
|
$260
million to $270 million
|
|
Retention
incentives
|
$60
million to $65 million
|
|
Asset
write-offs and accelerated depreciation
|
$45
million to $50 million
|
|
Other
*
|
$60
million to $65 million
|
* Other
costs consist primarily of costs to transfer product lines from one facility to
another and consultant fees.
In 2007,
we incurred total restructuring costs of $205 million. The following presents
these costs by major type and line item within our consolidated statements of
operations:
|
Termination
Benefits
|
Retention
Incentives
|
Intangible
Asset
Write-offs
|
Fixed
Asset
Write-offs
|
Accelerated
Depreciation
|
Other
|
Total
|
||||||||||||||||||||||
|
Cost
of goods sold
|
$ | 1 | $ | 1 | $ | 2 | ||||||||||||||||||||||
|
Selling,
general and adminstrative expenses
|
2 | 2 | 4 | |||||||||||||||||||||||||
|
Research
and development expenses
|
2 | 2 | ||||||||||||||||||||||||||
|
Amortization
expense
|
$ | 21 | 21 | |||||||||||||||||||||||||
|
Restructuring
charges
|
$ | 158 | $ | 8 | $ | 10 | 176 | |||||||||||||||||||||
| $ | 158 | $ | 5 | $ | 21 | $ | 8 | $ | 3 | $ | 10 | $ | 205 | |||||||||||||||
The
termination benefits recorded during 2007 represent primarily amounts incurred
pursuant to our on-going benefit arrangements, and have been recorded in
accordance with Financial Accounting Standards Board (FASB) Statement No. 112,
Employer’s Accounting for
Postemployment Benefits. We expect to record the remaining
termination benefits in 2008 when we identify with more specificity the job
classifications, functions and locations of the remaining head count to be
eliminated. The asset write-offs relate to intangible assets and
property, plant and equipment that are not recoverable following our decision in
October 2007 to (i) commit to the expense and head count reduction plan,
including the elimination, suspension or reduction of spending on certain
R&D projects, and (ii) restructure several businesses. The
retention incentives represent cash incentives, which are being recorded over
the future service period during which eligible employees must remain employed
with us to retain the award. The other restructuring costs are being
recognized and measured at their fair value in the period in which the liability
is incurred in accordance with FASB Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities.
We made
approximately $40 million of cash outlays associated with our restructuring
initiatives in 2007, which related to termination benefits, other restructuring
charges and retention incentive payments. These payments were made
using cash generated from our operations. We expect to make the
remaining cash outlays throughout 2008 and into 2009 using cash generated from
operations.
As a
result of our restructuring initiatives, we expect to reduce R&D and
SG&A expenses by $475 million to $525 million against a $4.1 billion
baseline, which represents our estimated annual R&D and SG&A expenses
54
at the
time we committed to these initiatives in 2007. This range represented the
annualized run rate amount of reductions we expect to achieve as we exit 2008,
as the implementation of these initiatives will take place throughout the year;
however, we expect to realize the majority of these savings in 2008. In
addition, we expect to reduce our R&D and SG&A expenses by an additional
$25 million to $50 million in 2009.
Refer to
Note G – Restructuring
Activities to our 2007 consolidated financial statements included in Item
8 of this Form 10-K for more information on our restructuring
plan.
Litigation-Related
Charges
In 2007,
we recorded a $365 million pre-tax charge associated with on-going patent
litigation involving our Interventional Cardiology business. See further
discussion of our material legal proceedings in Item 3. Legal Proceedings and
Note L — Commitments and
Contingencies to our 2007 consolidated financial statements included in
Item 8 of this Form 10-K.
In 2005,
we recorded a $780 million pre-tax charge associated with a litigation
settlement with Medinol, Ltd. 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.
Loss on Assets Held for
Sale
During
2007, we recorded a $560 million loss attributable primarily to the write-down
of goodwill in connection with the sale of certain of our businesses. Refer to
the Strategic Initiatives
section and Note E –
Assets Held for Sale to our 2007 consolidated financial statements
included in Item 8 of this Form 10-K for more information on these
transactions.
Interest
Expense
Our
interest expense increased to $570 million in 2007 as compared to $435 million
in 2006. The increase in our interest expense related primarily to an increase
in our average debt levels, as well as an increase in our average borrowing
rate. Our average debt levels for 2007 increased compared to 2006 as a result of
carrying a full year of incremental debt due to the acquisition of Guidant in
April 2006. Higher debt levels in 2007 contributed incremental interest expense
of $109 million. At December 31, 2007, $5.433 billion of our total debt was
at fixed interest rates, representing 66 percent of our total debt or 81
percent of our net debt4 balance.
Our
interest expense increased to $435 million in 2006 from $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 average borrowing rate.
Fair Value
Adjustment
We
recorded net expense of $8 million in 2007 and $95 million in 2006 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 in Note C - Acquisitions
to our 2007 consolidated financial statements included in Item 8 of
this Form 10-K.
This sharing of proceeds feature was marked-to-market through earnings based
upon changes in our stock price, among other factors. There was no fair value
associated with this feature as of December 31, 2007.
Other,
net
Our
other, net reflected income of $23 million in 2007, expense of $56 million in
2006, and income of
|
4
|
Our net debt balance represents
our total debt less our cash, cash equivalents and marketable securities.
Refer to the Liquidity and Capital
Resources section for more
information.
|
55
$13 million
in 2005. Our other, net included investment write-downs of $124 million in 2007,
$121 million in 2006, and $17 million in 2005, attributable primarily to
other-than-temporary declines in the fair value of our equity investments in,
and notes receivable from, certain publicly traded and privately held companies.
Our 2007 write-downs related to impairments of multiple investments. Our 2006
write-downs related primarily to a $34 million write-down associated with an
investment in a gene therapy company and a $27 million write-down associated
with one of our vascular sealing portfolio companies; the remainder of our 2006
write-downs related to impairments of multiple investments. These write-downs
were offset partially by realized gains on investments of $65 million in 2007,
$9 million in 2006, and $4 million in 2005. Refer to Note F – Investments and Notes
Receivable to our 2007 consolidated financial statements included in Item
8 of this Form 10-K for more information regarding our investment portfolio. In
addition, our other, net included interest income of $79 million in 2007, $67
million in 2006, and $36 million in 2005. Our interest income increased in
2007, as compared to 2006, due primarily to higher average cash balances, offset
by lower average investment rates. 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.
Tax Rate
The
following table provides a summary of our reported tax rate:
|
Percentage
Point
Decrease
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
vs.
2006
|
2006
vs.
2005
|
||||||||||||||||
|
Reported
tax rate
|
(13.0 | ) % | 1.2 | % | 29.5 | % | (14.2 | ) % | (28.3 | ) % | ||||||||||
|
Impact
of certain charges
|
(25.6 | ) % | (20.2 | ) % | 5.5 | % | (5.4 | ) % | (25.7 | ) % | ||||||||||
In 2007,
the decrease in our reported tax rate, as compared to 2006, related primarily
to additional foreign tax credits, changes in the geographic mix of our
revenues, and the impact of certain charges during 2007 that are taxed at
different rates than our effective tax rate. These charges included legal and
restructuring reserves, purchased research and development and goodwill
write-downs not deductible for tax purposes, as well as discrete items
associated with resolution of various tax matters and changes in estimates for
tax benefits claimed related to prior periods. In 2006, the decrease
in our reported tax rate, as compared to 2005, related primarily to the impact
of certain charges during 2006 that were taxed at different rates than our
effective tax rate. These charges included purchased research and development,
asset write-downs, reversal of taxes associated with unremitted earnings and tax
gains on the sale of intangible assets.
Management
currently estimates that our 2008 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, and based upon the
anticipated retro-active re-enactment of the U.S. R&D tax credit for all of
2008. However, acquisitions or dispositions in 2008 and geographic changes in
the manufacture of our products may positively or negatively impact our
effective tax rate.
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes. As a result of the implementation of Interpretation No. 48, we
recognized a $126 million increase in our liability for unrecognized tax
benefits. Approximately $26 million of this increase was reflected as a
reduction to the January 1, 2007 balance of retained
earnings. Substantially all of the remaining increase related to
pre-acquisition uncertain tax liabilities related to Guidant, which we recorded
as an increase to goodwill in accordance with Emerging Issues Task Force (EITF)
Issue No. 93-7, Uncertainties
Related to Income Taxes in a Purchase Business
Combination.
We are
subject to U.S. federal income tax as well as income tax of multiple state and
foreign jurisdictions. We have concluded all U.S. federal income tax
matters through 1997. Substantially all material state, local, and
foreign income tax matters have been concluded for all years through
2001.
56
The
following provides a summary of key performance indicators that we use to assess
our liquidity and operating performance.
Net Debt5
|
As of December
31,
|
||||||||
|
(in
millions)
|
2007
|
2006
|
||||||
|
Short-term
debt
|
$ |
256
|
$ |
7
|
||||
|
Long-term
debt
|
7,933
|
8,895
|
||||||
|
Total
debt
|
8,189
|
8,902
|
||||||
|
Less:
cash and cash equivalents
|
1,452
|
1,668
|
||||||
|
Net debt
|
$ |
6,737
|
$ |
7,234
|
||||
EBITDA6
|
(in
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Net
(loss) income
|
$ | (495 | ) | $ | (3,577 | ) | $ |
628
|
||||
|
Interest
income
|
(79 | ) | (67 | ) | (36 | ) | ||||||
|
Interest
expense
|
570
|
435
|
90
|
|||||||||
|
Income
tax (benefit) expense
|
(74 | ) |
42
|
263
|
||||||||
|
Depreciation
and amortization
|
939
|
781
|
314
|
|||||||||
|
EBITDA
|
$ |
861
|
$ | (2,386 | ) | $ |
1,259
|
|||||
Cash
Flow
|
(in
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Cash
provided by operating activities
|
$ |
934
|
$ |
1,845
|
$ |
903
|
||||||
|
Cash
used for investing activities
|
(474 | ) | (9,312 | ) | (551 | ) | ||||||
|
Cash
(used for) provided byfinancing activities
|
(680 | ) |
8,439
|
(954 | ) | |||||||
Operating Activities
Cash
generated by our operating activities continues to be a major source of funds
for servicing our outstanding debt obligations and investing in our growth. The
decrease in operating cash flow in 2007, as
|
5
|
Management uses net debt to
monitor and evaluate cash and debt levels and believes it is a measure
that provides valuable information regarding our net financial position
and interest rate exposure. Users of our financial statements should
consider this non-GAAP financial information in addition to, not as a
substitute for, nor as superior to, financial information prepared in
accordance with GAAP.
|
|
6
|
Management uses EBITDA to assess
operating performance and believes that it may assist users of our
financial statements in analyzing the underlying trends in our business
over time. In addition, management considers EBITDA as a component of the
financial covenants included in our credit agreements. Users of our
financial statements should consider this non-GAAP financial information
in addition to, not as a substitute for, nor as superior to, financial
information prepared in accordance with GAAP. Our EBITDA included
acquisition-, divestiture-, litigation- and restructuring-related charges
(pre-tax) of $1.231 billion in 2007 and $4.628 billion in 2006; see the
Executive
Summary
section above for a description of these charges. Our 2005
EBITDA included acquisition-, divestiture-, litigation- and
restructuring-related charges (pre-tax) of $1.102 billion, related
primarily to a litigation settlement with Medinol and purchased research
and development.
|
57
compared
to 2006, is attributable primarily to: approximately $400 million in tax
payments made in the first quarter of 2007, associated principally with the gain
on Guidant’s sale of its vascular intervention and endovascular solutions
businesses to Abbott; an increase in interest payments of $160 million due to
higher average debt levels; a decrease in EBITDA, excluding acquisition-,
divestiture-, litigation-, and restructuring-related charges, of approximately
$150 million; and an increase in severance and other merger and
restructuring-related payments of approximately $100 million, including
severance payments made in the first half of 2007 in conjunction with our
acquisition and integration of Guidant. See Note C – Acquisitions to our
consolidated financial statements included in Item 8 of this Form 10-K for
further details.
Investing
Activities
We made
capital expenditures of $363 million in 2007, as compared to $341 million
in 2006, including $110 million associated with our CRM and Cardiac Surgery
businesses. We expect to incur capital expenditures of approximately
$450 million during 2008, which includes capital expenditures to upgrade
further our quality systems and information systems infrastructure, to enhance
our manufacturing capabilities in order to support a second drug-eluting stent
platform, and to support continuous growth in our business units.
Our
investing activities during 2007 included $136 million of cash payments for
acquisitions of businesses, investments in publicly traded and privately held
companies, and acquisitions of certain technology rights; as well as $248
million in contingent payments, associated primarily with Advanced Bionics;
offset partially by $243 million of gross proceeds from the monetization of
several of our investments in, and notes receivable from, certain privately held
and publicly traded companies.
In
January 2007, we completed our acquisition of 100 percent of the fully diluted
equity of EndoTex Interventional Systems, Inc., a developer of stents used
in the treatment of stenotic lesions in the carotid arteries. We issued
approximately five million shares of our common stock valued at approximately
$90 million and approximately $10 million in cash, in addition to our previous
investments of approximately $40 million, to acquire the remaining interests of
EndoTex, and may be required to pay future consideration that is contingent upon
EndoTex achieving certain performance-related milestones.
In August
2007, we completed our acquisition of 100 percent of the fully diluted equity of
Remon Medical Technologies, Inc. Remon is a development-stage company
focused on creating communication technology for medical device applications. We
paid approximately $70 million in cash, net of cash acquired, to acquire Remon,
in addition to our previous investments of $3 million to acquire the remaining
interests of Remon. We may also be required to make future payments contingent
upon Remon achieving certain performance-related milestones.
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. During 2007, we amended our
term loan and revolving credit facility agreement and prepaid $1.0 billion
outstanding under the term loan, using $750 million of cash on hand and $250
million in borrowings against a credit facility secured by our U.S. trade
receivables. There was $250 million outstanding under this facility at December
31, 2007 and none outstanding at December 31, 2006. There were no amounts
outstanding under our separate $2.0 billion revolving credit facility as of
December 31, 2007 and 2006. In addition, in 2007, cash flows from financing
activities included a $60 million contractual payment made to reimburse Abbott
for a portion of its cost of borrowing $1.4 billion in 2006 to purchase shares
of our common stock in connection with our acquisition of Guidant. Refer to
Note C – Acquisitions
to our 2007 consolidated financial statements included in Item 8 of this Form
10-K for more information regarding the Abbott transaction.
We had
total debt of $8.189 billion at December 31, 2007 at an average
interest rate of 6.36 percent as compared to total debt of
$8.902 billion at December 31, 2006 at an average interest rate of
6.03 percent. The
58
debt maturity
schedule for the significant components of our debt obligations as of
December 31, 2007, is as follows:
|
Payments Due by
Period
|
|||||||||||||||||||||||||||
|
(in
millions)
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
||||||||||||||||||||
|
Term
loan
|
$ | 300 | $ | 1,700 | $ | 2,000 | $ | 4,000 | |||||||||||||||||||
|
Abbott
loan
|
900 | 900 | |||||||||||||||||||||||||
|
Senior
notes
|
850 | $ | 2,200 | 3,050 | |||||||||||||||||||||||
|
Credit and
security facility
|
$ | 250 | 250 | ||||||||||||||||||||||||
| $ | 250 | $ | 300 | $ | 1,700 | $ | 3,750 |
|
$ | 2,200 | $ | 8,200 | |||||||||||||||
In
January 2008, following the closing of the sale of, and receipt of proceeds for,
three of our businesses, we prepaid an additional $200 million of our term loan,
reducing the scheduled maturity in April 2009. We expect to make a further
payment of $425 million before the end of the first quarter of 2008. These
prepayments will satisfy the remaining obligation due in April 2009 and reduce
the 2010 maturity by $325 million. We expect to continue to use a significant
portion of our future operating cash flow over the next several years to reduce
our debt obligations.
Our term
loan and revolving credit facility agreement requires that we maintain certain
financial covenants. Among other items, our 2007 amendment extends a step-down
in the maximum permitted ratio of debt to consolidated EBITDA, as defined by the
agreement, as follows:
|
From:
|
To: |
|
4.5
times to 3.5 times on March 31, 2008
|
4.5
times to 4.0 times on March 31, 2009, and
|
|
|
4.0
times to 3.5 times on September 30,
2009
|
The
amendment also provides for an exclusion from the calculation of
consolidated EBITDA, as defined by the agreement, of up to $300 million of
restructuring charges incurred through June 30, 2009 and up to $500 million of
litigation and settlement expenses incurred (net of any litigation or settlement
income received) in any consecutive four fiscal quarters, not to exceed $1.0
billion in the aggregate, through June 30, 2009. Other than the amended
exclusions from the calculation of consolidated EBITDA, there was no change in
our minimum required ratio of consolidated EBITDA, as defined by the agreement,
to interest expense of greater than or equal to 3.0 to 1.0. As of December 31,
2007, we were in compliance with the required covenants. Exiting 2007, our ratio
of debt to consolidated EBITDA was approximately 3.6 to 1.0 and our ratio
of consolidated EBITDA to interest expense was approximately 4.0 to 1.0.
Our inability to maintain these covenants could require that we seek to further
renegotiate the terms of our credit facilities or seek waivers from compliance
with these covenants, both of which could result in additional borrowing
costs.
During
2007, our credit ratings from Standard & Poor’s Rating Services (S&P)
and Fitch Ratings were downgraded to BB+, and our credit rating from Moody’s
Investor Service was downgraded to Ba1. These ratings are below investment grade
and the ratings outlook by all three rating agencies is currently negative.
Credit rating changes may impact our borrowing cost, but do not require the
repayment of borrowings. These credit rating changes have not materially
increased the cost of our existing
borrowings.
Equity
59
based
compensation expense as a result of these exchanges because the fair values of
the options exchanged equaled the fair values of the DSUs issued.
During
2007, we received $132 million in proceeds from stock issuances related to
our stock option and employee stock purchase plans, as compared to $145 million
in 2006. 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 2007 or 2006. We repurchased
approximately 25 million shares of our common stock at an aggregate cost of
$734 million in 2005. 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, and
is based on conditions in existence as of December 31, 2007. See Note C - Acquisitions, Note H -
Borrowings and Credit Arrangements and Note J - Leases to our 2007
consolidated financial statements included in Item 8 of this Form 10-K
for additional information regarding our acquisitions, debt obligations and
lease arrangements.
|
Payments Due by
Period
|
||||||||||||||||||||||||||||
|
(in
millions)
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Operating
leases†
|
$ | 64 | $ | 49 | $ | 37 | $ | 24 | $ | 17 | $ | 49 | $ | 240 | ||||||||||||||
|
Capital
leases
|
5 | 4 | 3 | 3 | 3 | 47 | 65 | |||||||||||||||||||||
|
Purchase
obligations†,
††
|
105 | 5 | 2 | 112 | ||||||||||||||||||||||||
|
Minimum
royalty obligations†
|
16 | 29 | 26 | 14 | ||||||||||||||||||||||||