UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO
SECTION
13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
|
For
the fiscal year ended December 31, 2008
|
Commission
File No. 1-11083
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BOSTON
SCIENTIFIC CORPORATION
(Exact
Name Of Company As Specified In Its Charter)
|
DELAWARE
|
04-2695240
|
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification No.)
|
ONE
BOSTON SCIENTIFIC PLACE, NATICK, MASSACHUSETTS 01760-1537
(Address
Of Principal Executive Offices)
(508)
650-8000
(Company’s
Telephone Number)
Securities
registered pursuant to Section 12(b) of the Act:
|
COMMON
STOCK, $.01 PAR VALUE PER SHARE
|
NEW
YORK STOCK EXCHANGE
|
|
(Title
Of Class)
|
(Name
of Exchange on Which Registered)
|
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, a non-accelerated filer or a smaller reporting company as
defined in Rule 12b-2 of the Exchange Act. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
|
Large Accelerated
Filer x
|
Accelerated
Filer o
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Non-Accelerated
Filer o
|
Smaller Reporting
Company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes:
o No
x
The
aggregate market value of the Company’s common stock held by non-affiliates of
the Company was approximately $16.8 billion based on the closing price of the
Company’s common stock on June 30, 2008, 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,
2009 was 1,502,237,400.
TABLE
OF CONTENTS
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PART
I
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3
|
||
| ITEM 1. |
BUSINESS
|
3
|
|
| ITEM 1A. |
RISK
FACTORS
|
24
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|
| ITEM 1B. |
UNRESOLVED
STAFF COMMENTS
|
34
|
|
| ITEM 2. |
PROPERTIES
|
35
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|
| ITEM 3. |
LEGAL
PROCEEDINGS
|
35
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|
| ITEM 4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
35
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|
|
PART
II
|
36
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||
| ITEM 5. |
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
36
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| ITEM 6. |
SELECTED
FINANCIAL DATA
|
38
|
|
| ITEM 7. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
39
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| ITEM 7A. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
74
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| ITEM 8. |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
76
|
|
| ITEM 9. |
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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148
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| ITEM 9A. |
CONTROLS
AND PROCEDURES
|
148
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| ITEM 9B. |
OTHER
INFORMATION
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148
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PART
III
|
149
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| ITEM 10. |
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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149
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| ITEM 11. |
EXECUTIVE
COMPENSATION
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157
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| ITEM 12. |
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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157
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| ITEM 13. |
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
157
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| ITEM 14. |
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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157
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|
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PART
IV
|
158
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||
| ITEM 15. |
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
158
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|
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SIGNATURES
|
165
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||
2
PART
I
ITEM
1. BUSINESS
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,
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; 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
$8.1 billion in 2008.
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. On April 21, 2006, we consummated our acquisition of Guidant
Corporation. With this acquisition, we became a major provider in the 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 strategic acquisitions have helped us to 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 and will generally assist us in navigating the current
turmoil in the global economic markets.
Information
including revenues, measures of profits or losses and total assets for each of
our geographic segments, as well as net sales by business unit, appears in Note P – Segment Reporting to our
2008 consolidated financial statements included in Item 8 of this Annual
Report.
The
Cardiac Rhythm Management (CRM) Opportunity
3
treat
cardiac abnormalities, including:
|
•
|
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
|
|
•
|
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.
|
Tachycardia
(abnormally fast or chaotic heart rhythms) prevents the heart from pumping blood
efficiently and can lead to sudden cardiac death. Our 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. In 2008, we successfully launched our
COGNIS® CRT-D and TELIGEN® ICD implantable defibrillators, which are small,
thin, high-energy devices, in the U.S. and our EMEA (Europe/Middle East/Africa)
region, as well as in certain Inter-Continental countries.
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. Our 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. The LATITUDE® Weight Scale and Blood Pressure Monitor is
available as an optional component to the system. 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.
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, strategic alliances and scientific
research of drug-eluting stent systems. Drug-eluting stent
4
systems
accounted for 20 percent of our net sales in 2008 and 21 percent in
2007. Since our entry into the drug-eluting stent market with the launch of
our proprietary polymer-based paclitaxel-eluting stent technology for reducing
coronary restenosis, the TAXUS® Express²® coronary stent system, in the majority
of our international markets in 2003 and in the U.S. in 2004, we have become the
worldwide leader in the drug-eluting coronary stent market. In 2008,
we launched our second-generation drug-eluting stent system, the TAXUS® Liberté®
stent system; as well as the PROMUS® everolimus-eluting stent system,
supplied to us by Abbott Laboratories, in the U.S. following our earlier
launches in our EMEA and Inter-Continental markets. In January 2009, we
received approval from the Japanese Ministry of Health, Labor and Welfare to
market our TAXUS® Liberté® stent system in Japan, and are planning to launch the
TAXUS® Liberté® stent system in Japan during the first quarter of
2009. We expect to launch the PROMUS® stent system in Japan in the second half
of 2009, subject to regulatory approval. We are the only company to offer two
distinct drug-eluting stent platforms, which has enabled us to sustain our
leadership position in the worldwide drug-eluting stent market.
We
continue to develop and enhance our product offerings in the drug-eluting stent
market. In late 2008, we launched our TAXUS® Express²® Atom™
paclitaxel-eluting coronary stent system, a highly deliverable drug-eluting
stent designed for treating small coronary vessels. We expect to
launch an internally developed and manufactured next-generation everolimus-based
stent system, the PROMUS® Element™ platinum chromium coronary stent, in our EMEA
region, as well as in certain Inter-Continental countries, in late 2009 and in
the U.S. and Japan in mid-2012, subject to regulatory approval. Additionally, we
are conducting clinical trials for our third-generation paclitaxel-eluting
stent, the TAXUS® Element™ platinum chromium coronary stent
system.
Business
Strategy
Our
business strategy is to lead global markets for less-invasive medical devices by
developing and delivering products and therapies that address unmet patient
needs, provide superior clinical outcomes and demonstrate compelling economic
value. We intend to achieve leadership, drive profitable sales growth and
increase shareholder value by focusing on the following key
elements:
|
•
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Customers
|
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•
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Innovation
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|
•
|
Quality
|
|
•
|
People
|
|
•
|
Financial
Strength
|
Customers
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.
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.
Innovation
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
5
medical
specialists and purchasing organizations to satisfy many of their less-invasive
medical device requirements from a single source.
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 strategic 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.
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 2008,
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.
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 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. At
the end of 2007, we formally ended our Project Horizon program and transferred
all open projects to sustaining organizations. In 2008, we implemented the
Quality Master Plan to drive continuous improvement in compliance and quality
performance. In addition, our Compliance and Quality Committee of our Board of
Directors monitors our compliance and quality initiatives. Our efforts on our
quality systems were recognized during the year with the approval of several new
products by the U.S. Food and Drug Administration (FDA) and, in October
2008, the FDA informed us that our quality system is now in substantial
compliance with its Quality System Regulations. 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 our
quality strategy.
People
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 doing business with integrity as an important part of our success. Being
honest and fair with each other reflects on everything we do, especially as we
take our quality commitment to new heights. Our Code of Conduct, applicable to
all employees, officers and directors, is the cornerstone of our Corporate
Integrity Program. 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.
Financial
Strength
We are
focused on driving profitable sales growth, generating strong cash flow and
actively managing our balance sheet. In 2008, we completed, continued or
commenced several initiatives designed to increase our profitability and provide
better focus on our core businesses and priorities, including:
6
|
•
|
Completed
the sale of non-strategic businesses, consisting of our Auditory, Cardiac
Surgery, Vascular Surgery, Venous Access and Fluid Management businesses,
as well as our TriVascular Endovascular Aortic Repair (EVAR)
program;
|
|
|
•
|
Substantially
completed the sale of non-strategic
investments;
|
|
•
|
Continued
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;
|
|
•
|
Continued
execution of significant expense and head count
reductions; and
|
|
•
|
Commenced
our Plant Network Optimization plan, a complement to our previously
announced expense and head count reduction plan, which is intended to
simplify our plant network, reduce our manufacturing costs and improve
gross margins.
|
Our goal
was, and continues to be, 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. Each of these initiatives are described more fully in our Management’s
Discussion and Analysis included in Item 7 of this Annual Report.
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 2009, we expect to
see the benefits of manufacturing value improvement programs as our
manufacturing engineers, many of whom have been focused on quality remediation
over the last few years, are now once again focused on driving significant
manufacturing cost improvement programs. 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 2008, we expended more than $1 billion on research and development,
representing approximately 12 percent of our 2008 net sales. Our investment in
research and development reflects:
|
•
|
regulatory
compliance and clinical research, particularly relating to our
next-generation stent and CRM platforms and other internal development
programs, as well as others obtained through our strategic acquisitions;
and
|
|
•
|
sustaining
engineering efforts which factor customer feedback into continuous
improvement efforts for currently marketed and next generation
products.
|
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 2008 acquisitions
included the following:
|
•
|
Labcoat,
Ltd., a development-stage company that is developing a proprietary
drug-eluting stent coating technology designed to reduce the amount of
polymer and drug that comes in contact with the wall of the treated
vessel, while eliminating polymer and drug on the inner surface of the
stent where endothelial cell growth is required for healing;
and
|
|
•
|
CryoCor,
Inc., a developer and manufacturer of a disposable catheter system based
on proprietary cryoablation technology for the minimally invasive
treatment of cardiac arrhythmias.
|
We expect
that we will continue to focus selectively on strategic acquisitions and
alliances in order to provide new products and technology platforms to our
customers, including making additional investments in several of our existing
strategic relationships.
Products
Our
products are offered for sale principally by three dedicated business
groups—CRM; Cardiovascular, including our Cardiovascular, and Neurovascular
businesses; Endosurgery, including our Endoscopy and Urology/Gynecology
businesses; and Neuromodulation. Our Cardiovascular organization focuses on
products and technologies for use in interventional cardiology, cardiac rhythm
management, peripheral interventions, electrophysiology and neurovascular.
During 2008, we derived 79 percent of our net sales from our Cardiovascular
businesses (76 percent in 2007), approximately 17 percent from our
Endosurgery businesses (15 percent in 2007) and approximately three percent from
our Neuromodulation business (two percent in 2007). The remaining one percent of
our 2008 net sales (seven percent in 2007) was derived from businesses divested
in the first quarter of 2008, some from which we continue to generate net sales
as a result of post-separation transition services agreements.
The
following section describes certain of our CRM, Cardiovascular, Endosurgery and
Neuromodulation offerings:
We offer
a variety of implantable devices that monitor the heart and deliver electrical
impulses to treat cardiac rhythm abnormalities, including tachycardia
(abnormally fast heartbeats), which can put patients at risk of sudden cardiac
death and bradycardia (abnormally slow heartbeats), which impairs the ability to
live a full life. We also offer cardiac resynchronization devices that treat
heart failure by delivering electrical impulses to help the heart 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.
In 2008,
we launched several new CRM products, including the following:
ICD and
CRT-D Systems
In 2008,
we launched our first Boston Scientific-branded ICD and CRT-D devices, the
CONFIENT® ICD and LIVIAN® CRT-D product lines, in the U.S. We also launched our
COGNIS® CRT-D and TELIGEN® ICD products, which are small, thin high energy
devices, in the U.S., EMEA and certain Inter-Continental countries. These
full-featured pulse generators are based on a new common platform that offers
clinicians innovative options for customizing therapy to address the needs of
individual patients. We received regulatory approval in January 2009 to launch
our CONFIENT®
ICD in Japan and expect to launch our
8
COGNIS®
and TELIGEN® devices in Japan in 2009, subject to regulatory
approval.
In May
2008, our global launch of the ACUITY™ Spiral lead, a left ventricular lead,
added to our left ventricular leads portfolio enabling us to offer physicians
greater fixation options for delivering cardiac resynchronization therapy to
patients with various venous anatomies.
Pacemaker Systems
In May
2008, we launched our first new pacemaker system globally under the Boston
Scientific brand, the ALTRUA™ pacing system. The minute ventilation sensor in
these pacemakers allows restoration of chronotropic competence to patients who
lack the ability to moderate their heart rates appropriately in response to
physiologic stress. We expect to launch our ALTRUA™ pacing system in
Japan in 2009, subject to regulatory approval.
Remote Patient Monitoring System
To
support our ICD and CRT-D product lines, we launched two new enhancements to our
LATITUDE® remote patient monitoring system in the U.S. These enhancements
include an improved LATITUDE® web site and a smaller in-home communicator
featuring touch-screen technology. We plan to begin introducing our LATITUDE®
system in our EMEA region in 2009, subject to regulatory approval.
Electrophysiology
We offer
medical devices for the diagnosis and treatment of cardiac arrhythmias. Included
in our product offerings are RF generators, intracardiac ultrasound and
steerable ablation catheters, and diagnostic catheters. Our leading
brands include the Blazer™ cardiac ablation catheter, the Chilli II®™ cooled
ablation catheter and the MAESTRO 3000® Cardiac Ablation System. Our
electrophysiology products are distributed globally.
Interventional
Cardiology
Drug-Eluting
Stent Systems
We are
the market leader in the worldwide drug-eluting stent market. We market our
second-generation coronary stent, the TAXUS® Liberté® stent system; as well
as the PROMUS® everolimus-eluting coronary stent system, supplied to us by
Abbott, in our EMEA and Inter-Continental markets, and, in 2008, launched both
products in the U.S. market, expanding our drug-eluting stent portfolio to
include two distinct drug platforms. As of the closing of Abbott’s acquisition
of Guidant’s vascular intervention and endovascular solutions businesses, we
obtained a perpetual license to use the intellectual property used in Guidant’s
drug-eluting stent system program purchased by Abbott. In 2008, we also
initiated the U.S. launch of our TAXUS® Express²® Atom™ paclitaxel-eluting
coronary stent system, a highly deliverable drug-eluting stent designed for
treating small coronary vessels.
We expect
to launch our TAXUS® Liberté® stent system in Japan in the first quarter of
2009. We plan to launch the PROMUS® everolimus-eluting coronary stent system in
Japan in the second half of 2009, subject to regulatory approval. We are also
incurring incremental costs and expending incremental resources in order to
develop and commercialize additional products utilizing everolimus-eluting stent
technology and to support an internally developed and manufactured
next-generation everolimus-eluting stent system. We expect to launch an
internally developed and manufactured next-generation everolimus-based stent
system,
9
the
PROMUS® Element™ stent system, in our EMEA region, as well as certain
Inter-Continental countries, in late 2009 and in the U.S. and Japan in mid-2012.
In addition, we are conducting clinical trials for our third-generation
paclitaxel-eluting stent, the TAXUS® Element™ platinum chromium coronary stent
system, which we expect to launch in EMEA and certain Inter-Continental
countries during the fourth quarter of 2009, and in the U.S. and Japan in
mid-2011.
Bare-Metal
Stent Systems
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.
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.
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 vessels. The iLab® Ultrasound Imaging System, available in
the U.S., Japan and other international markets, 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.
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 the biliary
tree), 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 2009, we will begin
integrating certain products used for peripheral embolization procedures 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 December 2008, we received FDA approval for our
Express® SD Renal Monorail® premounted stent system for use as an adjunct to
percutaneous transluminal renal angioplasty in certain lesions of the renal
arteries. In October 2008, we received FDA approval for our Carotid WALLSTENT®
Monorail® Endoprosthesis for the treatment of patients with carotid artery
disease who are at high risk for surgery.
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
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treat
diseases of the neurovascular system. We market the GDC® Coils (Guglielmi
Detachable Coil) and Matrix® systems to treat brain aneurysms. We
plan to launch a next-generation family of detachable coils, including an
enhanced delivery system, in the U.S. in the second half of 2009. 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.
Embolic
Protection
Our
FilterWire EZ™ Embolic Protection System is a low profile filter designed to
capture embolic material that may become dislodged during a procedure, which
could otherwise travel into the microvasculature where it could cause a heart
attack or stroke. It is commercially available in the U.S., EMEA and
certain Inter-Continental countries 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.
Endosurgery
Esophageal,
Gastric and Duodenal (Small Intestine) Intervention
We market
a broad range of products to diagnose, treat and palliate a variety of
gastrointestinal diseases and conditions, including those affecting the
esophagus, stomach and colon. Common disease states include esophagitis, portal
hypertension, peptic ulcers and esophageal cancer. Our product offerings in this
area include disposable single and multiple biopsy forceps, balloon dilatation
catheters, hemostasis catheters and enteral feeding devices. We also market
a family of esophageal stents designed to offer improved dilatation force and
greater resistance to tumor in-growth. We 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 addition, we market the 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.
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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 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.
We also market the Prolieve® Thermodilatation System, a transurethral microwave
thermotherapy system for the treatment of BPH. 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, pelvic floor reconstruction
kits, 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.
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.
Neuromodulation
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 other sources of peripheral pain.
Marketing
and Sales
A
dedicated sales force of approximately 2,300 individuals in approximately 40
countries internationally, and over 3,200 individuals in the U.S. marketed our
products worldwide as of December 31, 2008. The majority of our net sales
are derived from countries in which we have direct sales organizations. 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
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a
dedicated corporate sales organization in the U.S. focused principally on
selling to major buying groups and integrated healthcare networks.
In 2008,
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
2008. However, large group purchasing organizations, hospital networks and
other buying groups have become increasingly important to our business and
represent a substantial portion of our U.S. net sales.
Certain
products are manufactured for us by third parties, such as the PROMUS®
everolimus-eluting coronary stent system, introducer sheaths and certain
guidewires, and pneumatic and laser lithotripters. 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
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. 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. We have moved from a distributor
model to a direct sales force, utilizing a dealer network, for our CRM
products in Japan, which has negatively impacted our net sales and market share
there and may continue to do so until we fully implement this
model.
International
net sales accounted for approximately 43 percent of our net sales in 2008.
Net sales and operating income attributable to our 2008 geographic regions are
presented in
Note P—Segment Reporting to our
2008 consolidated financial statements included in Item 8 of this Annual
Report.
We have
five international manufacturing facilities in Ireland, two in Costa Rica and
one in Puerto Rico. Approximately 32 percent of our products sold worldwide are
manufactured at these facilities. Additionally, we maintain international
research and development capabilities in Ireland, and Miyazaki, Japan, as well
as physician training centers in Paris, France and Tokyo, Japan. In
connection with certain of our restructuring initiatives, we intend to close two
of our manufacturing plants in Ireland.
Manufacturing
and Raw Materials
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,
13
supplier
controls, distribution controls and providing our operations teams with the
training and tools necessary to drive continuous improvement in product quality.
In 2008, we continued to focus on examining our operations and general business
activities to identify cost-improvement opportunities in order to enhance our
operational effectiveness. In early 2009, we announced our Plant Network
Optimization plan as a complement to our previously initiated expense and
head count reductions. The plan calls for reducing the number of
our manufacturing plants from 17 to 12 over the next three years and relocating
approximately 15 percent of our current value of production to different
facilities.
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®
drug-eluting stent system and our CRM products. In addition, our products
require sterilization prior to sale and we rely primarily on third party
vendors to perform this service. To the extent our third
party sterilizers are unable to process our
products, whether due to raw material, capacity, regulatory or
other constraints, we may be unable to transition to other
providers in a timely manner, which could have an adverse impact on our
operations.
We are
reliant on Abbott for our supply of PROMUS® stent systems. Any production or
capacity issues that affect Abbott’s manufacturing capabilities or the process
for forecasting, ordering and receiving shipments may impact our ability to
increase or decrease the level of supply to us in a timely manner; therefore,
our supply of PROMUS® stent systems may not align with customer demand, which
could have an adverse effect on our operating results. At present, we
believe that our supply of PROMUS® stent systems from Abbott is sufficient to
meet customer demand. Our supply agreement with Abbott for PROMUS® stent
systems extends through the middle of the fourth quarter of 2009 in Europe, and
is currently being reviewed by the European Commission for possible extension,
and through the end of the second quarter of 2012 in the U.S. and Japan. We
expect to launch an internally developed and manufactured next-generation
everolimus-eluting stent system, the PROMUS® Element™ stent system, in
our EMEA region and certain Inter-Continental countries in late 2009 and in the
U.S. and Japan in mid-2012.
Under the
terms of our supply arrangement with Abbott, the gross profit and operating
profit margin of a PROMUS® stent system is significantly lower than that of our
TAXUS® stent system. Therefore, if sales of our PROMUS® stent system
continue to increase in relation to our total drug-eluting stent system sales,
our profit margins will continue to decrease. Further, the price we
pay Abbott for our supply of PROMUS® stent systems is determined by our
contracts with them. Our cost is based, in part, on previously fixed
estimates of Abbott’s manufacturing costs for PROMUS® stent systems and
third-party reports of our average selling price of PROMUS® stent systems.
Amounts paid pursuant to this pricing arrangement are subject to a retroactive
adjustment at pre-determined intervals based on Abbott’s actual costs to
manufacture these stent systems for us and our average selling price of PROMUS®
stent systems. During 2009, we may make a payment to or receive a payment from
Abbott based on the differences between their actual manufacturing costs and the
contractually stipulated manufacturing costs and differences between our actual
average selling price and third-party reports of our average selling price, in
each case, with respect to our purchases of PROMUS® stent systems from Abbott
during 2008, 2007 and 2006. As a result, during 2009, our profit margins on the
PROMUS® stent system may increase or decrease.
Quality
Assurance
In
January 2006, legacy Boston Scientific received a corporate warning letter from
the FDA notifying us of serious regulatory problems at three of our facilities
and advising us that our corporate-wide corrective action plan relating to three
site-specific warning letters issued to us in 2005 was inadequate. We have
identified solutions to the quality system issues cited by the FDA and have made
significant progress in transitioning our organization to implement those
solutions. We implemented and continue to use the Quality Master Plan to drive
continuous improvement in compliance and quality performance. In addition, the
Compliance and Quality Committee of our Board of Directors monitors our
compliance and quality initiatives. During 2008, the FDA reinspected a number of
our facilities and, in October 2008, informed us that our quality system is now
in substantial compliance with its Quality System Regulations. The FDA has
approved all of our requests for final approval of Class III product submissions
previously on hold due to the corporate warning letter and has approved all
currently eligible requests for Certificates to Foreign Governments (CFGs). The
corporate warning letter remains in place pending final remediation of certain
Medical Device Report (MDR) filing issues, which we are actively working with
the FDA to resolve.
We are
committed to providing high quality products to our customers. To meet this
commitment, we have
14
implemented
updated quality systems and concepts throughout our organization. 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 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 various
international quality system regulations, including those of the FDA with
respect to products sold in the U.S. All of our manufacturing
facilities, including our U.S. and European distribution centers, are
certified under the ISO 13485:2003 quality system standard for medical devices,
which requires, among other items, an implemented quality system that applies to
component quality, supplier control, product design and manufacturing
operations. This certification can be obtained only after a complete audit of a
company’s quality system by an independent outside auditor. Maintenance of the
certification requires that these facilities undergo periodic
re-examination.
We
maintain an on-going initiative to seek ISO 14001 certification at our plants
around the world. ISO 14001, the environmental management system standard in the
ISO 14000 series, provides a voluntary framework to identify key environmental
aspects associated with our businesses. We engage in continuous environmental
performance improvement around these aspects. At present, ten 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
the current global economic conditions could put additional competitive pressure
on us, including on our average selling prices, overall procedure rates and
market sizes. 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.
Regulatory
Environment
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
15
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 pre-market approval (PMA), i.e.,
the “predicate” device. An appropriate predicate device for a pre-market
notification is one that (i) was legally marketed prior to May 28,
1976, (ii) was approved under a PMA but then subsequently reclassified from
class III to class II or I, or (iii) has been found to be
substantially equivalent and cleared for commercial distribution under a 510(k)
Submission. Applicants must submit descriptive data and, when necessary,
performance data to establish that the device is substantially equivalent to a
predicate device. In some instances, data from human clinical trials must also
be submitted in support of a 510(k) Submission. If so, these data must be
collected in a manner that conforms to the applicable Investigational Device
Exemption (IDE) regulations. The FDA must issue an order finding substantial
equivalence before commercial distribution can occur. Changes to existing
devices covered by a 510(k) Submission 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.
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.
16
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. In 2008, we were recognized for environmental
stewardship, winning a Leadership in Energy and Environmental Design (LEED)
award for the renovation of our research and development facility in
Marlborough, Massachusetts.
We are
members of 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.
Government
Affairs
We
maintain a global Government Affairs presence in Washington D.C. to
actively monitor and influence a myriad of legislative and administrative
policies impacting us, both on a domestic and an international basis. The
Government Affairs office works closely with members of Congress, key
Congressional committee staff and White House and Administration staff, which
facilitates our active engagement on issues affecting our business. Our
proactive approach and depth of political and policy expertise are aimed at
having our positions heard by federal, state and global decision-makers, while
also advancing our business objectives by educating policymakers on our
positions, key priorities and the value of our technologies.
The
Government Affairs office also manages the Company’s political action committee
and works closely with trade groups on issues affecting our industry and
healthcare generally.
Community
Outreach
We have
developed a program to assist to “close the gap“ in
addressing disparities in cardiovascular care for women, black Americans, and
Hispanic/Latino Americans. In 2006, a team of physicians and health
care professionals from across the United States came together to look at ways
to address these disparities by creating a “Proof of Principle” pilot in ten
test market cities. The committee facilitated the development of educational
tools and community events, to help healthcare professionals improve outcomes
for specific underserved patient populations.
We
believe that healthcare professionals can provide enhanced service, and ensure
better communications with patients when they are skilled in engaging women and
other minority patients. This is especially
17
important
as these underserved patient populations continue to grow.
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 sometimes 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 including the U.S. under the
new administration. Implementation of cost containment initiatives and
healthcare reforms in significant markets such as the U.S., 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. Spending on health care in some
countries, including the U.S., may also be affected by the global economic
slowdown.
Proprietary
Rights and Patent Litigation
We rely
on a combination of patents, trademarks, trade secrets and non-disclosure
agreements to protect our intellectual property. We generally file patent
applications in the U.S. and foreign countries where patent protection for our
technology is appropriate and available. At December 31, 2008, we held
approximately 6,500 U.S. patents, many of which have foreign counterparts, and
had more than 10,000 patent applications pending worldwide that cover various
aspects of our technology. In addition, we hold exclusive and non-exclusive
licenses to a variety of third-party technologies covered by patents and patent
applications. There can be no assurance that pending patent applications will
result in the issuance of patents, that patents issued to or licensed by us will
not be challenged or circumvented by competitors, or that these patents will be
found to be valid or sufficiently broad to protect our technology or to provide
us with a competitive advantage.
We rely
on non-disclosure and non-competition agreements with employees, consultants and
other parties to protect, in part, trade secrets and other proprietary
technology. There can be no assurance that these agreements will not be
breached, that we will have adequate remedies for any breach, that others will
not independently develop equivalent proprietary information or that third
parties will not otherwise gain access to our trade secrets and proprietary
knowledge.
There has
been substantial litigation regarding patent and other intellectual property
rights in the medical device industry, particularly in the areas in which
we compete. We have defended, and will continue to defend, ourself against
claims and legal actions alleging infringement of the patent rights of others.
Adverse determinations in any patent litigation could subject us to significant
liabilities to third parties, require us to seek licenses from third parties,
and, if licenses are not available, prevent us from manufacturing, selling or
using certain of our products, which could have a material adverse effect on 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
18
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.
See Item 3. Legal Proceedings
and Note L—Commitments and
Contingencies to our 2008 consolidated financial statements included in
Item 8 of this Annual Report for a further discussion of patent and other
litigation and proceedings in which we are involved. In management’s opinion, we
are not currently involved in any legal proceeding other than those specifically
identified in Note L,
which, individually or in the aggregate, could have a material effect on our
financial condition, results of operations and liquidity.
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 events
unknown at the present time. We are substantially self-insured with respect to
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 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 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, 2008, we had approximately 24,800 employees, including
approximately 12,700 in operations; 1,800 in administration; 4,200 in clinical,
regulatory and research and development; 5,500 in selling and marketing;
and 600 in distribution. Of these employees, we employed approximately 8,900
outside the U.S., approximately 5,600 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 head count reduction plan,
which resulted in the elimination of approximately 2,300 positions
worldwide. We also eliminated 2,000 positions in connection with
divestiture of our non-strategic businesses, which were completed in early
2008. We added 500 positions during 2008, primarily in direct
sales-related positions. In early 2009, we announced our Plant
Network Optimization plan, aimed at simplifying our plant network, reducing our
manufacturing costs and improving gross margins, which we estimate will result
in the reduction of approximately 300 positions by the end of 2011.
Seasonality
Our
worldwide sales do not reflect any significant degree of seasonality; however,
customer purchases have been lighter in the third quarter of prior years than in
other quarters. This reflects, among other factors, lower demand during summer
months, particularly in European countries.
Available
Information
Copies of
our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and
19
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, Chief Accounting 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 Annual Report.
Safe Harbor for
Forward-Looking Statements
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 21E 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, head count reduction and plant network optimization
initiatives; timing of regulatory approvals and plant certifications; our
regulatory and quality compliance; expected research and development efforts;
product development and iterations; new product launches and launches of our
existing products in new geographies; our market position in the marketplace for
our products and our sales and marketing strategy; the effect of new accounting
pronouncements; the outcome of matters before taxing authorities; intellectual
property and litigation matters; our ability to finance our capital needs
and expenditures; the ability of our suppliers and third-party sterilizers to
meet our requirements; 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 our strategy regarding
acquisitions, divestitures and strategic investments, as well as integration
execution. 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.
Except as
required by law, we do not intend to update any forward-looking statements below
even if new information becomes available or other events occur in the future.
We have identified these forward-looking statements below, which are based on
certain risks and uncertainties, including the risk factors described in Item 1A
under the heading “Risk Factors.” Factors that could cause actual results to
differ materially from those expressed in forward-looking statements are
contained below and in the risk factors described in Item 1A under the heading
“Risk Factors.”
CRM
|
•
|
Our
estimates for the worldwide CRM market, the increase in the size of the
CRM market above existing levels and our ability to increase CRM net
sales;
|
|
•
|
The
overall performance of, and referring physician, implanting physician and
patient confidence in, our and our competitors’ CRM products and
technologies, including our COGNIS® CRT-D and TELIGEN® ICD systems and our
LATITUDE® Patient Management
System;
|
20
|
•
|
The
results of CRM clinical trials undertaken by us, our competitors or other
third parties;
|
|
•
|
Our
ability to successfully launch next-generation products and technology
features, including the INGENIO™ pacemaker system;
|
|
•
|
Our
ability to grow sales of both new and replacement implant
units;
|
|
•
|
Our
ability to retain key members of our CRM sales force and other key
personnel;
|
|
•
|
Competitive
offerings in the CRM market and the timing of receipt of regulatory
approvals to market existing and anticipated CRM products and
technologies;
|
|
•
|
Our
ability to successfully and timely implement a direct sales model for our
CRM products in Japan; and
|
|
•
|
Our
ability to avoid disruption in the supply of certain components or
materials or to quickly secure additional or replacement components or
materials on a timely basis.
|
Coronary
Stents
|
•
|
Volatility
in the coronary stent market, our estimates for the worldwide coronary
stent market, the recovery of the coronary stent market and our ability to
increase coronary stent net sales, competitive offerings and the timing of
receipt of regulatory approvals to market existing and anticipated
drug-eluting stent technology and other stent
platforms;
|
|
•
|
Our
ability to successfully launch next-generation products and technology
features;
|
|
•
|
Our
ability to maintain or expand our worldwide market positions through
reinvestment in our two drug-eluting stent
programs;
|
|
•
|
Our
ability to manage the mix of our PROMUS® stent system net sales relative
to our total drug-eluting stent net sales and to launch on-schedule a
next-generation everolimus-eluting stent system with gross profit margins
more comparable to our TAXUS® stent
system;
|
|
•
|
Our
share of the worldwide drug-eluting 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, and the penetration rate of drug-eluting stent technology in the
U.S. and international markets;
|
|
•
|
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;
|
|
•
|
Abbott’s
ability to obtain approval for its XIENCE V™ everolimus-eluting coronary
stent system in Japan and Abbott’s payment to us of the associated
milestone obligation;
|
|
•
|
Our
reliance on Abbott’s manufacturing capabilities and supply chain, and our
ability to align our PROMUS® stent system supply from Abbott with customer
demand through our forecasting and ordering
processes;
|
21
|
•
|
Enhanced
requirements to obtain regulatory approval in the U.S. and around the
world and the associated impact on new product launch schedules and the
cost of product approval and
compliance;
|
|
•
|
Our
ability to manage inventory levels, accounts receivable, gross margins and
operating expenses and to react effectively to worldwide economic and
political conditions; and
|
|
•
|
Our
ability to retain key members of our cardiology sales force and other key
personnel.
|
Litigation
and Regulatory Compliance
|
•
|
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 in the U.S.
and around the world;
|
|
•
|
Our
ability to minimize or avoid future FDA warning letters or field actions
relating to our products and the on-going inherent risk of potential
physician advisories or field actions related to medical
devices;
|
|
•
|
The
effect of our litigation; risk management practices, including
self-insurance; and compliance activities on our loss contingencies, legal
provision and cash flows;
|
|
•
|
The
impact of our stockholder derivative and class action, patent, product
liability, contract and other litigation, governmental investigations and
legal proceedings;
|
|
•
|
Costs
associated with our on-going compliance and quality activities and
sustaining organizations;
|
|
•
|
The
impact of increased pressure on the availability and rate of third-party
reimbursement for our products and procedures worldwide;
and
|
|
•
|
Legislative
or regulatory efforts to modify the product approval or reimbursement
process, including a trend toward demonstrating clinical outcomes,
comparative effectiveness and cost
efficiency.
|
Innovation
|
•
|
Our
ability to complete planned clinical trials successfully, to obtain
regulatory approvals and to develop and launch products on a timely basis
within cost estimates, including the successful completion of in-process
projects from purchased research and
development;
|
|
•
|
Our
ability to manage research and development and other operating expenses
consistent with our expected net sales
growth;
|
|
•
|
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 our other
businesses;
|
|
•
|
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;
|
22
|
•
|
Our
failure to succeed at, or our decision to discontinue, any of our growth
initiatives;
|
|
•
|
Our
ability to integrate the strategic acquisitions we have
consummated;
|
|
•
|
Our
ability to fund with cash or common stock any acquisitions or alliances,
or to fund contingent payments associated with these
alliances;
|
|
•
|
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 any of these
projects;
|
|
•
|
The
timing, size and nature of strategic initiatives, market opportunities and
research and development platforms available to us and the ultimate cost
and success of these initiatives;
and
|
|
•
|
Our
ability to successfully identify, develop and market new products or the
ability of others to develop products or technologies that render our
products or technologies noncompetitive or
obsolete.
|
International
Markets
|
•
|
Dependency
on international net sales to achieve
growth;
|
|
•
|
Risks
associated with international operations, including compliance with local
legal and regulatory requirements as well as changes in reimbursement
practices and policies; and
|
|
•
|
The
potential effect of foreign currency fluctuations and interest rate
fluctuations on our net sales, expenses and resulting
margins.
|
|
|
Capital
Management
|
•
|
Our
ability to implement, fund, and achieve sustainable cost improvement
measures, including our plant network optimization plan, intended to
improve overall gross profit margins, and sustaining our other expense and
head count reduction initiatives and restructuring
program;
|
|
•
|
Our
ability to generate sufficient cash flow to fund operations, capital
expenditures, and strategic investments, as well as to effectively manage
our debt levels and covenant compliance and to minimize the impact of
interest rate fluctuations on our earnings and cash
flows;
|
|
•
|
Our
ability to access the public and private capital markets when desired and
to issue debt or equity securities on terms reasonably acceptable to
us;
|
|
•
|
Our
ability to recover substantially all of our deferred tax assets;
and
|
|
•
|
The
impact of examinations and assessments by domestic and international
taxing authorities on our tax provision, financial condition or results of
operations.
|
23
Other
|
•
|
Risks
associated with significant changes made or to be made to our
organizational structure, or to the membership of our executive committee
or Board of Directors;
|
|
•
|
Risks
associated with our acquisition of Guidant, including, among other things,
the indebtedness we have incurred and the integration challenges we will
continue to face;
|
|
•
|
Our
ability to retain our key employees and avoid business disruption and
employee distraction as we execute our expense and head count reduction
and plant network optimization initiatives;
and
|
|
•
|
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 and our plant network
optimization plan, in order to streamline our operations, reduce our debt
obligations and improve our gross
margins.
|
Several
important factors, in addition to the specific factors discussed in connection
with each forward-looking statement individually and the risk factors described
in Item 1A under the heading “Risk Factors,” could affect our future results and
growth rates and could cause those results and rates to differ materially from
those expressed in the forward-looking statements and the risk factors contained
in this report. These additional factors include, among other things, future
economic, competitive, reimbursement and regulatory conditions; new product
introductions; demographic trends; intellectual property; financial market
conditions; and future business decisions made by us and our competitors, all of
which are difficult or impossible to predict accurately and many of which are
beyond our control. Therefore, we wish to caution each reader of this report to
consider carefully these factors as well as the specific factors discussed with
each forward-looking statement and risk factor in this report and as disclosed
in our filings with the SEC. These factors, in some cases, have affected and in
the future (together with other factors) could affect our ability to implement
our business strategy and may cause actual results to differ materially from
those contemplated by the statements expressed in this report.
ITEM
1A. RISK
FACTORS
In
addition to the other information contained in this Annual Report 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 Annual Report. 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 net sales from the sale of drug-eluting
coronary stent systems and cardiac rhythm management (CRM) products in the
United States. 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.
Net sales
from drug-eluting coronary stent systems represented approximately 20 percent of
our consolidated net sales during the year ended December 31, 2008. Our
U.S. TAXUS® sales declined in 2008 relative to prior years, due largely to
recent competitive launches. In addition, the U.S. market size for
drug-eluting stents has declined due to 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. There can be no assurance that
these concerns will be alleviated in the near term or that the size of the U.S.
drug-eluting stent market will return to previous levels. In 2007, our
24
TAXUS®
stent system and Johnson & Johnson’s CYPHER® stent system were the only two
drug-eluting stents available in the U.S. market. In 2008, Medtronic launched
its Endeavor® drug-eluting stent system and Abbott launched its XIENCE V™
everolimus-eluting stent system in the U.S.
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 PROMUS®
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 in Japan, receipt of
insufficient quantities of the PROMUS® stent system from Abbott, changing
acceptance 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.
We expect
to launch an internally developed and manufactured next-generation
everolimus-based stent system, the PROMUS® Element™ platinum chromium coronary
stent, in Europe and certain Inter-Continental countries in late 2009 and in the
United States and Japan in mid-2012. Our supply of the existing
PROMUS® stent system from Abbott extends through the middle of the fourth
quarter of 2009 in Europe, and is currently being reviewed by the European
Commission for possible extension, and through the end of the second quarter of
2012 in the U.S. and Japan. If we are unable to obtain regulatory
approval and timely launch our PROMUS® Element stent system, the absence of an
everolimus-eluting stent in our product pipeline may materially adversely affect
our results of operations, our financial position, or financial
condition.
Worldwide
CRM market growth rates over the past three years, including the U.S. ICD
market, have been below those experienced in prior years, resulting primarily
from previous industry field actions and from a lack of new indications for
use. The U.S. ICD market represents approximately 40 percent of the
worldwide CRM market. There can be no assurance that the size of the CRM market
will increase above existing levels or that we will be able to increase CRM
market share or increase net sales in a timely manner, if at all. Net sales
from our CRM products represented approximately 28 percent of our consolidated
net sales during the year ended December 31, 2008 and there can be no
assurance of continued acceptance of our new products. Therefore,
decreases in net sales from our CRM products could have a significant impact on
our results of operations. In addition, our inability to increase our CRM net
sales, particularly in the U.S., could result in additional goodwill and
intangible asset impairment charges.
The profit margin
of a PROMUS® stent system is
significantly lower than that of our TAXUS® system and an
increase of PROMUS® sales relative
to TAXUS® sales may
adversely impact our gross profit and operating profit margins. The price we pay
Abbott for our supply of PROMUS® stent systems is
further impacted by our contractual arrangement with Abbott and is subject to
retroactive adjustment, which may also negatively impact our profit
margins. In addition, we are reliant on Abbott for supply of
PROMUS® and any
disruption to that supply could adversely effect our operating
results.
Under the
terms of our supply arrangement with Abbott, the gross profit and operating
profit margin of a PROMUS® stent system is significantly lower than that of our
TAXUS® stent system. Therefore, if sales of our PROMUS® stent system
continue to increase in relation to our total drug-eluting stent system sales,
our profit margins will continue to decrease. Further, the price we
pay Abbott for our supply of PROMUS® stent systems is determined by our
contracts with them. Our cost is based, in part, on previously fixed
25
estimates
of Abbott’s manufacturing costs for PROMUS® stent systems and third-party
reports of our average selling price of PROMUS® stent systems. Amounts paid
pursuant to this pricing arrangement are subject to a retroactive adjustment at
pre-determined intervals based on Abbott’s actual costs to manufacture these
stent systems for us and our average selling price of PROMUS® stent systems.
During 2009, we may make a payment to or receive a payment from Abbott based on
the differences between their actual manufacturing costs and the contractually
stipulated manufacturing costs and differences between our actual average
selling price and third-party reports of our average selling price, in each
case, with respect to our purchases of PROMUS® stent systems from Abbott during
2008, 2007 and 2006. As a result, during 2009, our profit margins on the PROMUS®
stent system may increase or decrease.
In
addition, we are reliant on Abbott for our supply of PROMUS® stent systems. Any
production or capacity issues that affect Abbott’s manufacturing capabilities or
our process for forecasting, ordering and receiving shipments may impact our
ability to increase or decrease the level of supply to us in a timely manner;
therefore, our supply of PROMUS® stent systems may not align with customer
demand, which could have an adverse effect on our operating
results.
Recent
deterioration in the economy and credit markets may adversely affect our future
results of operations.
As widely
reported, the global credit markets and financial services industry have been
experiencing a period of upheaval characterized by the bankruptcy, failure,
collapse or sale of various financial institutions, severely diminished
liquidity and credit availability, declines in consumer confidence, declines in
economic growth, increases in unemployment rates, uncertainty about economic
stability and an unprecedented level of intervention from the United States
federal government. There can be no assurance that there will not be
further deterioration in the global economy, credit and financial markets and
confidence in economic conditions. While the ultimate outcome of
these events cannot be predicted, it may have a material adverse effect on us
and our ability to borrow money in the credit markets and potentially to draw on
our revolving credit facility or otherwise. Similarly, our customers
and suppliers may experience financial difficulties or be unable to borrow money
to fund their operations which may adversely impact their ability or decision to
purchase our products, particularly capital equipment, or to pay for our
products they do purchase on a timely basis, if at all.
Our
share price will fluctuate, and accordingly, the value of our investment may be
unpredictable.
Stock
markets in general and our common stock in particular have experienced
significant price and volume volatility over the past year. The market price and
trading volume of our common stock may continue to be subject to significant
fluctuations due not only to general stock market conditions but also to
variability in the prevailing sentiment regarding our operations or business
prospects, as well as, among other things, potential further sales of our common
stock to satisfy the financial commitments of our historical
shareholders.
New
competitors have entered the drug-eluting stent market, which has impacted our
market share and may continue to negatively affect our net sales.
Until
2008, our TAXUS® paclitaxel-eluting coronary stent system was one of only two
drug-eluting stent products available in the U.S. Additional
competitors have recently entered the U.S. drug-eluting stent market, including
the introduction of the Endeavor® Zotarolimus-Eluting Coronary Stent by
Medtronic, Inc. and the launch of Abbott Laboratories’ XIENCE V™ drug-eluting
stent system, which has put increased pressure on our U.S. drug-eluting stent
system sales and may negatively impact our market share and average selling
prices. Our share of the U.S. drug-eluting stent market, as well as
unit prices, may continue to be impacted as the market has become more
competitive.
Our
industry is experiencing greater scrutiny and regulation by governmental
authorities, which has led to certain costs and business distractions as we
respond to inquiries and comply with new regulations, and may lead to greater
governmental regulation in the future.
26
The
medical devices we design, develop, manufacture and market are subject to
rigorous regulation by the FDA and numerous other federal, state and foreign
governmental authorities. These authorities have been increasing
their scrutiny of our industry. Recently, we have received inquiries
from Congress and other government agencies regarding, among other things, the
conduct of clinical trials, conflicts of interests and financial arrangements
with health care providers and consultants, and product promotional
practices. We are cooperating with the requests, which cooperation
involves document production costs, human resources costs and diversion of
management and employee focus. In addition, certain states, including
Massachusetts, where we are headquartered, have recently passed or are
considering legislation restricting our interactions with health care providers
and requiring disclosure of many payments to them, compliance with which will
require significant human resource and financial costs as well as complex
information technology systems. The Federal government has recently
introduced similar legislation, which may or may not preempt state
laws. Recent Supreme Court case law has clarified that the
FDA’s authority over medical devices preempts state tort laws, but legislation
has been introduced at the Federal level to allow state intervention, which
could lead to increased and inconsistent regulation at the state
level. We anticipate that the government will continue to scrutinize
our industry closely and that we will be subject to more rigorous regulation by
governmental authorities in the future.
Because
we derive a significant amount of our net sales from our cardiovascular
businesses, changes in market or regulatory conditions that impact those
businesses or our inability to develop non-cardiovascular products, could have a
material adverse effect on our business, financial condition or results of
operations.
During
2008, we derived approximately 79 percent of our net sales from our
Cardiovascular group, which includes our CRM, Cardiovascular and Neurovascular
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 further increase CRM
net sales, it may adversely affect our business, financial condition or results
of operations. Net sales from drug-eluting coronary stent systems
represented approximately 20 percent of our consolidated net sales for
2008. Although we have seen a recent uptick in overall percutaneous
coronary intervention (PCI) volumes, there can be no assurance that percutaneous
coronary intervention procedures or the overall 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.
Should
we be unable to resolve the remaining outstanding issues related to our FDA
warning letters in a timely manner, our business, financial condition and
results of operations, and physician perception of our products could be
materially adversely affected.
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. 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 corrective action plan relating to three
site-specific warning letters issued to us in 2005 was inadequate. During 2008,
the FDA reinspected a number of our facilities and, in October 2008, informed us
that our quality system is now in substantial compliance with its Quality System
Regulations. The FDA has approved all of our requests for final
approval of Class III product submissions previously on hold due to the
corporate warning letter, and has approved all of our currently eligible
requests for Certificates to Foreign Governments (CFGs). The
corporate warning letter remains in place pending final remediation of certain
Medical Device Report (MDR) filing issues. This remediation has resulted and may
continue to result in medical device and vigilance reporting, which could
adversely impact physician perception of our products.
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 the remaining outstanding
27
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.
We
are subject to extensive medical device regulation, which may impede or hinder
the approval or sale of our products and, in some cases, may ultimately result
in an inability to obtain approval of certain products 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:
|
•
|
take
a significant period of time;
|
|
•
|
require
the expenditure of substantial
resources;
|
|
•
|
involve
rigorous pre-clinical and clinical testing, as well as increased
post-market surveillance;
|
|
•
|
require
changes to products; and
|
|
•
|
result
in limitations on the indicated uses of
products.
|
Countries
around the world have adopted more stringent regulatory requirements that have
added or 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 for new products or modifications to existing
products on a timely basis or that any 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
28
condition
or results of operations.
We
may not meet regulatory quality standards applicable to our manufacturing and
quality processes, which could have an adverse effect on our business, financial
condition and 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.
We
may not effectively be able to protect our intellectual property rights,
which could have a material 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.
29
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.
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 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, we may be
required to obtain a license on terms which may not be favorable to us, if at
all. 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.
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 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,
30
regardless
of the 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. If we are unsuccessful in our acquisitions,
investments and alliances, we may be unable to continue to grow our business
significantly or may record asset impairment charges in the future. These
acquisitions, investments and alliances have been
significant sources of growth for us. The success of any acquisition, investment
or alliance that we may undertake will depend on a number of factors,
including:
|
•
|
our
ability to identify suitable opportunities for acquisition, investment or
alliance, if at all;
|
|
•
|
our
ability to finance any future acquisition, investment or alliance on terms
acceptable to us, if at all;
|
|
•
|
whether
we are able to establish an acquisition, investment or alliance on terms
that are satisfactory to us, if at
all;
|
|
•
|
the
strength of the other companies’ underlying technology and ability to
execute;
|
|
•
|
regulatory approvals and reimbursement levels of the acquired
products and related procedures;
|
|
•
|
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 plant network optimization
initiatives; our long-term expense reduction programs may result in an increase
in short-term expense; and our efforts may lead to additional unintended
consequences.
In early
2009, we announced our Plant Network Optimization plan, aimed at
simplifying our plant network, reducing our manufacturing costs and improving
gross margins. Activities under the plan 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 in connection with our plant network
optimization efforts or a material decrease in employee morale or productivity
could negatively affect our business, financial condition and results of
operations. In addition, head count reductions may subject us to the
risk of litigation, which could result in substantial cost. Moreover,
our plant network optimization program will result in charges and expenses that
will 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
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 $6.745 billion at December 31, 2008, attributable in large part to
our acquisition of Guidant. We expect 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
31
flows,
and have sold 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 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 satisfy 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, particularly in light of
the current tightening in the credit markets.
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.
Our
current credit ratings from Standard & Poor’s Rating Services (S&P) and
Fitch Ratings are BB+, and our credit rating from Moody’s Investor Service is
Ba1. All of these are below investment grade ratings and the ratings outlook by
S&P and Moody’s is currently negative. Our inability to regain
investment grade credit ratings could impact our ability to obtain financing on
terms reasonably acceptable to us, and increase the cost of borrowing funds in
the future.
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 next-generation everolimus-based stent system, the PROMUS® Element™
platinum chromium coronary stent, in Europe in late 2009 and in the United
States in mid-2012, 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 products and technologies. 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 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, 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
32
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.
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 net sales. 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 net sales 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 43 percent of our net sales in
2008. 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, interest 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; and
international markets may also be impacted by foreign government efforts to
understand healthcare practices and pricing in other countries, which
could result in increased pricing transparency across geographies and pressure to harmonize reimbursement
and ultimately reduce the selling
prices of our products. 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. 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.
Healthcare
cost containment pressures and legislative or administrative reforms resulting
in restrictive reimbursement practices of third-party payors or preferences for
alternate therapies could decrease the demand for our products, the prices which
customers are willing to pay for those products and the number of procedures
performed using our devices, which could have an adverse effect 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
33
medical
devices or denies coverage for those procedures could have a material adverse
effect on our business, financial condition or results of
operations.
Major
third-party payors for hospital services in the U.S. and abroad continue to work
to contain healthcare costs. The introduction of cost containment incentives,
combined with closer scrutiny of healthcare expenditures by both private health
insurers and employers, has resulted in increased discounts and contractual
adjustments to hospital charges for services performed and has shifted services
between inpatient and outpatient settings. Initiatives to limit the increase of
healthcare costs, including price regulation, are also underway in several
countries in which we do business. Hospitals or physicians may respond to these
cost-containment pressures by substituting lower cost products or other
therapies for our products. In connection with Guidant’s product recalls,
certain third-party payors have sought, and others may seek, recourse against us
for amounts previously reimbursed.
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 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 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 external providers to sterilize our products, and any
disruption in sources of supply or any ability to sterilize our products could
adversely impact our production efforts and could materially adversely affect
our business, financial condition or results of operations.
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, expertise, 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.
In
addition, our products require sterilization prior to sale and we rely primarily
on third party vendors to perform this service. To the
extent our third party sterilizers are unable
to process our products, whether due to raw material,
capacity, regulatory or other constraints, we may be unable to
transition to other providers in a timely manner, which could have an
adverse impact on our operations.
ITEM
1B. UNRESOLVED STAFF
COMMENTS
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.
34
ITEM 2. PROPERTIES
Our world
headquarters are located in Natick, Massachusetts, with additional support
provided from regional headquarters located in Tokyo, Japan and Paris,
France. As of December 31, 2008, our manufacturing, research, distribution
and other key facilities totaled approximately 10 million square feet, seven
million of which are owned by us, with the balance under lease
arrangements. As of December 31, 2008, our principal manufacturing and
technology centers were located in Minnesota, California, Florida, Indiana,
Utah, Washington, Ireland, Costa Rica and Puerto Rico. Our products are
distributed internationally from customer fulfillment centers in Massachusetts,
The Netherlands and Japan. As of December 31, 2008, we maintained 17
manufacturing facilities; nine in the U.S.; one in Puerto Rico; five in Ireland;
and two in Costa Rica; as well as various distribution and technology centers.
Many of these facilities produce and manufacture products for more than
one of our divisions and include research facilities.
The
following is a summary of our facilities (in square feet):
|
Owned
|
Leased
|
Total
|
|||||||||||
|
Domestic
|
5,486,831 | 1,542,026 | 7,028,857 | ||||||||||
|
Foreign
|
1,385,599 | 1,418,694 | 2,804,293 | ||||||||||
| 6,872,430 | 2,960,720 | 9,833,150 | |||||||||||
See Note L—Commitments and
Contingencies to our 2008 consolidated financial statements included in
Item 8 of this Annual Report.
None.
35
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
|
||||||||
|
2008
|
|||||||||
|
First
Quarter
|
$ | 13.21 | $ | 10.98 | |||||
|
Second
Quarter
|
14.11 | 12.23 | |||||||
|
Third
Quarter
|
13.89 | 11.75 | |||||||
|
Fourth
Quarter
|
11.47 | 5.48 | |||||||
|
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 | |||||||
We did
not pay a cash dividend in 2008, 2007 or 2006. 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, 2009, there were 16,934 record holders of our common
stock.
The
closing price of our common stock on February 20, 2009 was
$8.18.
We did
not repurchase any of our common stock in 2008, 2007 or 2006. There are
approximately 37 million remaining shares authorized for purchase under our
share repurchase program. We currently do not anticipate material repurchases in
2009.
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, 2004, and that
all dividends were reinvested.
36
37
ITEM
6. SELECTED
FINANCIAL DATA
FIVE-YEAR
SELECTED FINANCIAL DATA
(in
millions, except per share data)
|
Operating
Data
|
||||||||||||||||||||
|
Year
Ended December 31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Net
sales
|
$ | 8,050 | $ | 8,357 | $ | 7,821 | $ | 6,283 | $ | 5,624 | ||||||||||
|
Gross
profit
|
5,581 | 6,015 | 5,614 | 4,897 | 4,332 | |||||||||||||||
|
Selling,
general and administrative expenses
|
2,589 | 2,909 | 2,675 | 1,814 | 1,742 | |||||||||||||||
|
Research
and development expenses
|
1,006 | 1,091 | 1,008 | 680 | 569 | |||||||||||||||
|
Royalty
expense
|
203 | 202 | 231 | 227 | 195 | |||||||||||||||
|
Amortization
expense
|
543 | 620 | 474 | 142 | 112 | |||||||||||||||
|
Goodwill
and intangible asset impairment charges
|
2,790 | 21 | 56 | 10 | ||||||||||||||||
|
Acquisition-related
milestone
|
(250 | ) | ||||||||||||||||||
|
Purchased
research and development
|
43 | 85 | 4,119 | 276 | 65 | |||||||||||||||
|
Gain
on divestitures
|
(250 | ) | ||||||||||||||||||
|
Loss
on assets held for sale
|
560 | |||||||||||||||||||
|
Restructuring
charges
|
78 | 176 | ||||||||||||||||||
|
Litigation-related
charges
|
334 | 365 | 780 | 75 | ||||||||||||||||
|
Total
operating expenses
|
7,086 | 6,029 | 8,563 | 3,929 | 2,758 | |||||||||||||||
|
Operating
(loss) income
|
(1,505 | ) | (14 | ) | (2,949 | ) | 968 | 1,574 | ||||||||||||
|
(Loss)
income before income taxes
|
(2,031 | ) | (569 | ) | (3,535 | ) | 891 | 1,494 | ||||||||||||
|
Net
(loss) income
|
(2,036 | ) | (495 | ) | (3,577 | ) | 628 | 1,062 | ||||||||||||
|
Net
(loss) income per common share:
|
||||||||||||||||||||
|
Basic
|
$ | (1.36 | ) | $ | (0.33 | ) | $ | (2.81 | ) | $ | 0.76 | $ | 1.27 | |||||||
|
Assuming
dilution
|
$ | (1.36 | ) | $ | (0.33 | ) | $ | (2.81 | ) | $ | 0.75 | $ | 1.24 | |||||||
|
Weighted-average
shares outstanding — basic
|
1,498.5 | 1,486.9 | 1,273.7 | 825.8 | 838.2 | |||||||||||||||
|
Weighted-average
shares outstanding — assuming dilution
|
1,498.5 | 1,486.9 | 1,273.7 | 837.6 | 857.7 | |||||||||||||||
|
Balance
Sheet Data
|
||||||||||||||||||||
|
As
of December 31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Cash,
cash equivalents and marketable securities
|
$ | 1,641 | $ | 1,452 | $ | 1,668 | $ | 848 | $ | 1,640 | ||||||||||
|
Working
capital*
|
2,219 | 2,691 | 3,399 | 1,152 | 684 | |||||||||||||||
|
Total
assets
|
27,139 | 31,197 | 30,882 | 8,196 | 8,170 | |||||||||||||||
|
Borrowings
(long-term and short-term)
|
6,745 | 8,189 | 8,902 | 2,020 | 2,367 | |||||||||||||||
|
Stockholders’
equity
|
13,174 | 15,097 | 15,298 | 4,282 | 4,025 | |||||||||||||||
|
Book
value per common share
|
$ | 8.77 | $ | 10.12 | $ | 10.37 | $ | 5.22 | $ | 4.82 | ||||||||||
|
*
|
In
2008 and 2007, we reclassified certain assets and liabilities to the
“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 of certain of our businesses,
or assets that are expected to be sold in 2009. We have reclassified 2007
balances for comparison purposes on the face of the consolidated balance
sheets, and restated both 2007 and 2006 in the working capital metric
above. We have not restated working capital for 2005 or 2004, 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.
|
See also the notes to our consolidated
financial statements included in Item 8 of this Annual
Report.
38
ITEM
7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis should be read in conjunction with the
consolidated financial statements and accompanying notes contained in Item 8 of
this Annual Report.
Introduction
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 business strategy is to lead global markets for less-invasive
medical devices by developing and delivering products and therapies that address
unmet patient needs, provide superior clinical outcomes and demonstrate
compelling economic value. We intend to achieve leadership, drive profitable
sales growth and increase shareholder value by focusing on:
|
•
|
Customers
|
|
•
|
Innovation
|
|
•
|
Quality
|
|
•
|
People
|
|
•
|
Financial
Strength
|
In the
first quarter of 2008, we completed the divestiture of certain non-strategic
businesses. Our operating results for the years ended December 31, 2007 and 2006
include a full year of results of these businesses. Our operating results for
the year ended December 31, 2008 include the results of these businesses through
the date of separation. We are involved in several post-closing separation
activities through transition service agreements, some from which we continue to
generate net sales. These transition service agreements expire throughout 2009
and the first half of 2010. Refer to the Strategic Initiatives section
and Note F – Divestitures and
Assets Held for Sale to our consolidated financial statements contained
in Item 8 of this Annual Report for a description of
these business divestitures.
On April
21, 2006, we consummated the acquisition of Guidant Corporation. With this
acquisition, we became a major provider in the cardiac rhythm management (CRM)
market, enhancing our overall competitive position and long-term growth
potential, and further diversifying our product portfolio. We also now share
certain drug-eluting stent technology with Abbott Laboratories, which gives us
access to a second drug-eluting stent program, and complements our
TAXUS® stent system program. See Note D- Acquisitions to our 2008
consolidated financial statements included in Item 8 of this Annual Report
for further details on the Guidant acquisition and Abbott transaction. Our
operating results for the years ended December 31, 2008 and 2007 include a full
year of results of our CRM business that we acquired from Guidant. Our operating
results for the year ended December 31, 2006 include the results of the CRM
business beginning on the date of acquisition. We have included supplemental pro
forma financial information in
Note D – Acquisitions to our 2008 consolidated financial statements
included in Item 8 of this Annual Report which gives effect to the
acquisition as though it had occurred at the beginning of 2006.
Executive
Summary
Financial Highlights and
Trends
Net sales
in 2008 were $8.050 billion, which included sales from divested businesses
of $69 million, as compared to net sales of $8.357 billion in 2007, which
included sales from divested business of $553 million, a decrease of $307
million or four percent. Foreign currency fluctuations increased our net sales
by $213 million in 2008, as compared to 2007. Excluding the impact of foreign
currency and sales from divested businesses, our net sales were flat with the
prior year.
Worldwide
net sales of our CRM products increased eight percent in 2008, including an
eight percent
39
increase
in our U.S. CRM net sales and a seven percent increase in international CRM
product net sales. These increases were driven by multiple product launches
in both our U.S. and international markets, highlighted by the launch
of our COGNIS® cardiac resynchronization therapy defibrillator (CRT-D) system
and our TELIGEN® implantable cardioverter defibrillator (ICD) system. In
addition, net sales from our Endosurgery businesses grew eight percent and our
Neuromodulation division increased net sales by twenty percent in 2008, as
compared to 2007. Partially offsetting these increases, was a decline in
worldwide net sales from our Cardiovascular division of four percent during
2008, due principally to the impact of new competition in the U.S. drug-eluting
stent market. However, we realized increased U.S. drug-eluting stent
market share in the fourth quarter of 2008, as compared to the third quarter of
2008, and exited the year with an estimated 49 percent share of the U.S.
drug-eluting stent market for the month of December.
Our
reported net loss for 2008 was $2.036 billion, or $1.36 per share, on
approximately 1.5 billion weighted-average shares outstanding, as compared to a
net loss for 2007 of $495 million, or $0.33 per share, also on 1.5 billion
weighted-average shares outstanding. Our reported results for 2008 included
goodwill and intangible asset impairment charges and acquisition-, divestiture-,
litigation- and restructuring-related net charges; and discrete tax items of
$2.796 billion (after-tax), or $1.87 per share, consisting of:
|
|
•
|
$2.756 billion
($2.790 billion pre-tax) of goodwill and intangible asset impairment
charges, associated primarily with a write-down of
goodwill;
|
|
•
|
a
$184 million gain ($250 million pre-tax) related to the receipt of an
acquisition-related milestone payment from
Abbott;
|
|
•
|
$44
million ($43 million pre-tax) of net purchased research and development
charges, associated primarily with the acquisitions of Labcoat, Ltd. and
CryoCor, Inc.;
|
|
•
|
$100 million of
costs ($133 million pre-tax) associated with our on-going expense and head
count reduction initiatives;
|
|
•
|
a
$185 million gain ($250 million pre-tax), associated with the sale of
certain non-strategic
businesses;
|
|
•
|
$54
million of net losses ($80 million pre-tax) in connection with the sale of
certain non-strategic
investments;
|
|
•
|
$238 million of
litigation-related charges ($334 million pre-tax) resulting primarily from
a ruling by a federal judge in a patent infringement case brought against
us by Johnson & Johnson;
and
|
|
•
|
$27
million of discrete tax benefits related to certain tax positions
associated with prior period acquisition-, divestiture-, litigation- and
restructuring-related
charges.
|
During
the fourth quarter of 2008, we recorded a $2.613 billion goodwill impairment
charge associated with our acquisition of Guidant. The decline in our stock
price and our market capitalization during the fourth quarter created an
indication of potential impairment of our goodwill balance; therefore, we
performed an interim impairment test. Key factors contributing to the impairment
charge included disruptions in the credit and equity markets, and the resulting
impacts to weighted-average costs of capital, and changes in CRM market demand
relative to our original assumptions at the time of acquisition. Refer to Note E – Goodwill and Other
Intangible Assets to our consolidated financial statements contained in
Item 8 of this Annual Report for more information.
Our
reported results for 2007 included goodwill and intangible asset impairment
charges and acquisition-, divestiture-, litigation- and restructuring-related
charges of $1.110 billion (after-tax), or $0.74 per share. Refer to
Liquidity and Capital
Resources for a discussion of these charges.
We
continued to generate substantial cash flow during 2008. Cash provided by
operating activities was $1.216 billion in 2008 as compared to $934 million
in 2007. At December 31, 2008, we had total debt of $6.745 billion, cash and
cash equivalents of $1.641 billion and working capital of $2.219 billion. During
2008, we prepaid $1.425 billion of debt under our term loan and our credit
facility secured by our U.S. trade receivables and, in February 2009, prepaid an
additional $500 million. As a result, our next scheduled debt maturity is $325
million due in April 2010.
40
Strategic
Initiatives
In 2007,
we announced several new initiatives designed to enhance short- and long-term
shareholder value, including the restructuring of several of our businesses and
product franchises; the sale of non-strategic businesses and investments; and
significant expense and head count reductions. Our goal was, and continues to
be, to better align expenses with revenues, while preserving our ability to make
needed investments in quality, research and development (R&D), capital
improvements and our people that are essential to our long-term success. These
initiatives have helped to provide better focus on our core businesses and
priorities, which we believe will strengthen Boston Scientific for the future
and position us for increased, sustainable and profitable sales growth. The
execution of this plan enabled us to reduce R&D and selling, general and
administrative (SG&A) expenses by an annualized run rate of approximately
$500 million exiting 2008.
Restructuring
In
October 2007, our Board of Directors approved, and we committed to, an expense
and head count reduction plan, which resulted in the elimination of
approximately 2,300 positions worldwide. We initiated activities under the plan
in the fourth quarter of 2007 and expect to be substantially complete worldwide
in 2010. Refer to Results of
Operations and Note H – Restructuring-related
Activities to our consolidated financial statements included in Item 8 of
this Annual Report for information on restructuring-related activities and
estimated costs.
Plant
Network Optimization
On
January 27, 2009, our Board of Directors approved, and we committed to, a plant
network optimization plan, which is intended to simplify our manufacturing plant
structure by transferring certain production lines from one facility to another
and by closing certain facilities. The plan is a complement to our previously
announced expense and head count reduction plan, and is intended to improve
overall gross profit margins. Activities under the plan will be initiated in
2009 and are expected to be substantially completed by the end of 2011. Refer
to Results of Operations
and Note H –
Restructuring-related Activities to our consolidated financial statements
included in Item 8 of this Annual Report for information on
restructuring-related activities and estimated costs.
Divestitures
During
2007, we determined that our Auditory, Vascular Surgery, Cardiac Surgery, Venous
Access and Fluid Management businesses were no longer strategic to our on-going
operations. Therefore, we initiated the process of selling these businesses in
2007, and completed their sale in the first quarter of 2008, as discussed below.
We received pre-tax proceeds of approximately $1.3 billion from the sale of
these businesses and our TriVascular Endovascular Aortic Repair (EVAR) program,
and eliminated 2,000 positions in connection with these
divestitures.
In
January 2008, we completed the sale of a controlling interest in our Auditory
business and drug pump development program, acquired with Advanced Bionics
Corporation in 2004, to entities affiliated with the principal former
shareholders of Advanced Bionics for an aggregate purchase price of $150 million
in cash. In
connection with the sale, we recorded a loss of $367 million (pre-tax) in 2007,
attributable primarily to the write-down of goodwill. In addition, we recorded a
tax benefit of $7 million during 2008 in connection with the closing of the
transaction. Also in January 2008, we completed the sale of our Cardiac Surgery
and Vascular Surgery businesses for net cash proceeds of approximately $700
million. In connection with the sale, we recorded a pre-tax loss of $193 million
in 2007, representing primarily a write-down of goodwill. In addition, we
recorded a tax expense of $19 million during 2008 in connection with the closing
of the transaction. In February 2008, we completed the sale of our Fluid
Management and Venous Access businesses for net cash proceeds of approximately
$400 million. We recorded a pre-tax gain of $234 million ($161
million after-tax) during 2008 associated with this transaction.
41
Further,
in March 2008, we sold our EVAR program obtained in connection with our 2005
acquisition of TriVascular, Inc. for $30 million in cash. We discontinued our
EVAR program in 2006. In connection with the sale, we recorded a pre-tax gain of
$16 million ($36 million after-tax) during 2008.
During
2007, in connection with our strategic initiatives, we announced our intent to
sell the majority of our investment portfolio in order to monetize those
investments determined to be non-strategic. In June 2008, as part of our
initiative to monetize non-strategic investments, we signed separate definitive
agreements with Saints Capital and Paul Capital Partners to sell the majority of
our investments in, and notes receivable from, certain publicly traded and
privately held entities for gross proceeds of approximately $140 million. In
connection with these agreements, we received proceeds of $95 million during
2008. In addition, we received $54 million of proceeds from other transactions
to monetize certain other non-strategic investments and notes receivable. We
recorded net pre-tax losses of approximately $80 million during 2008 related to
these monetization initiatives and the write-down of certain non-strategic
investments. We expect to receive $45 million of remaining proceeds from the
Saints and Paul transactions during 2009, and do not expect to record
significant gains or losses in 2009 related to these definitive agreements.
Refer to our Other, net
discussion, as well as Note G – Investments and Notes
Receivable to our consolidated financial statements included in Item 8 of
this Annual Report for more information on our investment portfolio
activity.
Corporate Warning
Letter
In
January 2006, legacy Boston Scientific received a corporate warning letter from
the U.S. Food and Drug Administration (FDA) notifying us of serious regulatory
problems at three of our facilities and advising us that our corporate-wide
corrective action plan relating to three site-specific warning letters issued to
us in 2005 was inadequate. We have identified solutions to the quality system
issues cited by the FDA and have made significant progress in transitioning our
organization to implement those solutions. During 2008, the FDA reinspected a
number of our facilities and, in October 2008, informed us that our quality
system is now in substantial compliance with its Quality System Regulations. The
FDA has approved all of our requests for final approval of Class III product
submissions previously on hold due to the corporate warning letter and has
approved all currently eligible requests for Certificates to Foreign Governments
(CFGs). Since October 2008, we have received approval to market the following
new products in the U.S.:
|
•
|
our TAXUS® Express2®
Atom™ paclitaxel-eluting coronary stent system, designed for treating
small coronary vessels;
|
|
•
|
our
TAXUS® Liberté® paclitaxel-eluting coronary stent system, our
second-generation drug-eluting stent
system;
|
|
•
|
our
Carotid WALLSTENT® Monorail® Endoprosthesis, a less-invasive alternative
to surgery for treating carotid artery
disease;
|
|
•
|
our
Apex™ Percutaneous Transluminal Coronary Angioplasty
(PTCA) dilatation catheter, for treating the most challenging
atherosclerotic
lesions;
|
|
•
|
our
Express® SD Renal Monorail® stent system, the first low-profile,
pre-mounted stent approved in the U.S. for use in renal arteries;
and
|
|
•
|
our
Sterling™ Monorail®
and Over-the-Wire balloon dilatation catheter for use in the renal and
lower extremity
arteries.
|
The FDA
also approved the use of our TAXUS® Express2®
paclitaxel-eluting coronary stent system for the treatment of in-stent
restenosis1 (ISR) in bare-metal stents, the first ISR
approval granted by the FDA.
The
corporate warning letter remains in place pending final remediation of certain
Medical Device Report (MDR) filing issues, which we are actively working with
the FDA to resolve. This remediation has resulted and may continue to result in
incremental medical device and vigilance reporting, which could adversely impact
physician perception of our products.
1 In-stent restenosis is re-narrowing of
the vessel inside a stent.
42
Business
and Market Overview
Cardiac Rhythm
Management
We
estimate that the worldwide CRM market approximated $10.8 billion in 2008, as
compared to approximately $10.0 billion in 2007, and estimate that U.S. ICD
system sales represented approximately 40 percent of the worldwide CRM market in
both years. Worldwide CRM market growth rates over the past three years,
including the U.S. ICD market, have been below those experienced in prior years,
resulting primarily from previous industry field actions and from a lack of new
indications for use. In 2008, however, we began to see renewed growth of the
worldwide CRM market with steadily increasing implant volumes.
Net sales
of our CRM products represented approximately 28 percent of our consolidated net
sales for 2008 and 25 percent in 2007. The following are the components of our
worldwide CRM product sales:
|
(in
millions)
|
Year
Ended
December
31, 2008
|
Year
Ended
December
31, 2007
|
||||||||||||||||||||||
|
U.S.
|
International
|
Total
|
U.S.
|
International
|
Total
|
|||||||||||||||||||
|
ICD
systems
|
$ | 1,140 | $ | 541 | $ | 1,681 | $ | 1,053 | $ | 489 | $ | 1,542 | ||||||||||||
|
Pacemaker
systems
|
340 | 265 | 605 | 318 | 264 | 582 | ||||||||||||||||||
| $ | 1,480 | $ | 806 | $ | 2,286 | $ | 1,371 | $ | 753 | $ | 2,124 | |||||||||||||
Our U.S.
sales of CRM products in 2008 increased $109 million, or eight percent, as
compared to 2007. Our U.S. sales benefited from growth in the U.S.
CRM market and from the successful launch of our next-generation COGNIS® CRT-D
and TELIGEN® ICD systems, as well as the launches of our CONFIENT® ICD system, the
LIVIAN® CRT-D
system, and the ALTRUA™ family of pacemaker systems. We experienced ten
percent growth in U.S. CRM sales during each of the second, third and fourth
quarters of 2008, largely as a result of these new product
launches.
Our
international CRM product sales increased $53 million, or seven percent in 2008,
as compared to 2007, due primarily to an increase in the size of the
international ICD market. However, our net sales and market share in Japan have
been negatively impacted as we move to a direct sales model for our CRM products
in Japan and, until we fully implement this model, our net sales and market
share in Japan may continue to be negatively impacted.
During
2008, we received more than a dozen new CRM product approvals. We will continue
to execute on our product pipeline and expect to begin offering our LATITUDE®
Patient Management System in certain European countries in 2009. This
technology, which enables physicians to monitor device performance remotely
while patients are in their homes, is a key component of many of our implantable
device systems. We also plan to launch our next-generation pacemaker, the
INGENIO™ pacemaker system, in the U.S., our EMEA (Europe/Middle East/Africa)
region and certain Inter-Continental countries in the first half of 2011.
We believe that these launches position us for sustainable growth within the
worldwide CRM market.
Net sales
from our CRM products represent a significant source of our overall net sales.
Therefore, increases or decreases in net sales from our CRM products could have
a significant impact on our results of operations. While we believe that the
size of the CRM market will increase above existing levels, there can be no
assurance as to the timing or extent of this increase. We believe we are well
positioned within the CRM market; however, the following variables may impact
the size of the CRM market and/or our share of that market:
|
•
|
our
continued ability to improve 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;
|
43
|
•
|
our
ability to successfully launch next-generation products and
technology;
|
|
•
|
the
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;
and
|
|
•
|
average selling
prices and the overall number of procedures
performed.
|
Coronary
Stents
The size
of the coronary stent market is driven primarily by the number of percutaneous
coronary intervention (PCI) procedures performed, as well as the percentage of
those that are actually stented; 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). We estimate that the worldwide coronary stent
market approximated $5.0 billion in 2008 and 2007, and estimate that
drug-eluting stents represented approximately 80 percent of the dollar
value of worldwide coronary stent market sales in both years. Uncertainty
regarding the efficacy of drug-eluting stents, as well as the increased
perceived risk of late stent thrombosis2 following the use of drug-eluting stents,
contributed to a decline in the worldwide drug-eluting stent market size during
2006 and 2007. However, data addressing this risk and supporting the safety of
drug-eluting stent systems positively affected trends in the growth of the
drug-eluting stent market in 2008, as referring cardiologists regained
confidence in this technology.
Net sales
of our coronary stent systems represented approximately 23 percent of our
consolidated net sales for 2008 and 24 percent in 2007. We are the only company
in the industry to offer a two-drug platform strategy with our TAXUS®
paclitaxel-eluting stent system and the PROMUS® everolimus-eluting stent system.
The following are the components of our worldwide coronary stent system
sales:
|
(in
millions)
|
Year
Ended
December
31, 2008
|
Year
Ended
December
31, 2007
|
||||||||||||||||||||||
|
U.S.
|
International
|
Total
|
U.S.
|
International
|
Total
|
|||||||||||||||||||
|
TAXUS®
|
$ | 621 | $ | 697 | $ | 1,318 | $ | 1,006 | $ | 754 | $ | 1,760 | ||||||||||||
|
PROMUS®
|
212 | 104 | 316 | 28 | 28 | |||||||||||||||||||
|
Drug-eluting
|
833 | 801 | 1,634 | 1,006 | 782 | 1,788 | ||||||||||||||||||
|
Bare-metal
|
88 | 129 | 217 | 104 | 135 | 239 | ||||||||||||||||||
| $ | 921 | $ | 930 | $ | 1,851 | $ | 1,110 | $ | 917 | $ | 2,027 | |||||||||||||
During 2008, U.S. sales of our drug-eluting stent systems declined $173 million, or 17 percent, due primarily to an increase in competition following recent competitive launches. We believe that our average share of the
2 Late stent thrombosis is the formation
of a clot, or thrombus, within the stented area one year or more after
implantation of the stent.
44
U.S.
drug-eluting stent market declined to 46 percent during 2008, as compared to 55
percent in 2007. In addition, pricing pressure resulted in a
reduction in the average selling price of our TAXUS® stent system in the U.S. by
approximately five percent as compared to the prior year. However, increasing
penetration rates have had a positive effect on the size of the U.S.
drug-eluting stent market. Average drug-eluting stent penetration rates in the
U.S. were 68 percent during 2008 (exiting 2008 at 73 percent for the month of
December), as compared to 65 percent during 2007 (exiting 2007 at 62 percent for
the month of December). We believe this is a strong indicator that the recovery
of the U.S. drug-eluting stent market is continuing and the market is
strengthening. In addition, the launch of our TAXUS® Express2® Atom™
and TAXUS® Liberté® stent systems in the U.S. during the fourth quarter of 2008
had a positive effect on our market share. We believe that exiting 2008, we were
the market leader with 49 percent share of the U.S. drug-eluting stent market
for the month of December, and are well positioned entering 2009.
Our
international drug-eluting stent system sales increased $19 million, or two
percent, in 2008 as compared to 2007, due to a full year of drug-eluting stent
sales in Japan and growth in the size of the international drug-eluting stent
market as a result of increased PCI procedural volume and higher penetration
rates. In May of 2007, we launched our TAXUS® Express2® coronary
stent system in Japan, and, in
January 2009, we received approval from the Japanese Ministry of Health, Labor
and Welfare to market our second-generation TAXUS® Liberté® drug-eluting stent
system in Japan. We are planning to launch our TAXUS® Liberté® stent system in
Japan during the first quarter of 2009 and the PROMUS® everolimus-eluting
coronary stent system in the second half of 2009, subject to regulatory
approval.
In July
2008, Abbott launched its XIENCE V™ everolimus-eluting coronary stent system,
and, simultaneously, we launched the PROMUS® everolimus-eluting coronary stent
system, supplied to us by Abbott. As of the closing of Abbott’s acquisition of
Guidant’s vascular intervention and endovascular solutions businesses, we
obtained a perpetual license to use the intellectual property used
in Guidant’s drug-eluting stent system program purchased by Abbott. We
believe that being the only company to offer two distinct drug-eluting stent
platforms provides us a considerable advantage in the drug-eluting stent market
and has enabled us to sustain our worldwide leadership position. However, under
the terms of our supply arrangement with Abbott, the gross profit and operating
profit margin of a PROMUS® stent system is significantly lower than that of our
TAXUS® stent system. Our PROMUS® stent systems have operating profit margins
that approximate half of our TAXUS® stent system operating profit margin.
Therefore, if sales of our PROMUS® stent system continue to increase in relation
to our total drug-eluting stent system sales, our profit margins will continue
to decrease. Refer to our Gross Profit discussion for
more information on the impact this sales mix has had on our gross profit
margins. Further,
the price we pay Abbott for our supply of PROMUS® stent systems is determined by
our contracts with them. Our cost is based, in part, on previously
fixed estimates of Abbott’s manufacturing costs for PROMUS® stent systems and
third-party reports of our average selling price of PROMUS® stent systems.
Amounts paid pursuant to this pricing arrangement are subject to a retroactive
adjustment at pre-determined intervals based on Abbott’s actual costs to
manufacture these stent systems for us and our average selling price of PROMUS®
stent systems. During 2009, we may make a payment to or receive a payment from
Abbott based on the differences between their actual manufacturing costs and the
contractually stipulated manufacturing costs and differences between our actual
average selling price and third-party reports of our average selling price, in
each case, with respect to our purchases of PROMUS® stent systems from Abbott
during 2008, 2007 and 2006. As a result, during 2009, our profit margins on the
PROMUS® stent system may increase or decrease.
We are
reliant on Abbott for our supply of PROMUS® stent systems. Any production or
capacity issues that affect Abbott’s manufacturing capabilities or the process
for forecasting, ordering and receiving shipments may impact our ability to
increase or decrease the level of supply to us in a timely manner; therefore,
our supply of PROMUS® stent systems may not align with customer demand, which
could have an adverse effect on our operating results. At present, we
believe that our supply of PROMUS® stent systems from Abbott is sufficient to
meet customer demand. Further, our supply agreement with Abbott for PROMUS®
stent systems extends through the middle of the fourth quarter of 2009 in
Europe, and is currently being reviewed by the European Commission for possible
extension, and through the end of the second quarter of 2012 in the U.S. and
Japan. We are incurring incremental costs and expending incremental resources in
order to develop and commercialize an internally developed and manufactured
next-generation everolimus-eluting stent system. We expect that this stent
system, the PROMUS® Element™ stent system, will have gross profit margins more
comparable to our TAXUS® stent system and will improve our overall
45
gross
profit and operating profit margins once launched. We expect to launch PROMUS®
Element in our EMEA region and certain Inter-Continental countries in late
2009 and in the U.S. and Japan in mid-2012. We expect to launch our
first-generation PROMUS® everolimus-eluting coronary stent system during the
second half of 2009 in Japan. Our product pipeline also includes the TAXUS®
Element™ coronary stent system. We expect to launch our TAXUS® Element stent
system in EMEA and certain Inter-Continental countries during the fourth quarter
of 2009 and in the U.S. and Japan in mid-2011.
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 these
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.
We
believe that we can sustain our leadership position within the worldwide
drug-eluting stent market for a variety of reasons, including:
|
•
|
our
two drug-eluting stent platform
strategy;
|
|
•
|
the
broad and consistent long-term results of our TAXUS® clinical trials, and
the favorable results of the XIENCE V™/PROMUS®
stent system clinical trials to
date;
|
|
•
|
the
performance benefits of our current and future
technology;
|
|
•
|
the
strength of our pipeline of drug-eluting stent
products;
|
|
•
|
our
overall position in the worldwide interventional medicine market and our
experienced interventional cardiology sales force;
and
|
|
•
|
the
strength of our clinical, marketing and manufacturing
capabilities.
|
However,
a further decline in net sales from our drug-eluting stent systems could 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:
|
•
|
our
ability to successfully launch next-generation products and technology
features;
|
|
•
|
physician and
patient confidence in our technology and attitudes toward drug-eluting
stents, including the continued abatement of prior concerns regarding the
risk of late stent
thrombosis;
|
|
•
|
changes in
drug-eluting stent penetration rates, the overall number of PCI procedures
performed, average number of stents used per procedure, and average
selling prices of drug-eluting stent
systems;
|
|
•
|
the
outcome of intellectual property
litigation;
|
|
•
|
variations in
clinical results or perceived product performance of our or 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;
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.
|
46
There
continues to be significant intellectual property litigation in the coronary
stent market. We are currently involved in a number of legal proceedings with
certain of our existing competitors, including Johnson & Johnson, and other
independent patent holders. There can be no assurance that an adverse outcome in
one or more proceedings would not materially impact our ability to meet our
objectives in the coronary stent market, and our liquidity and results of
operations. We previously had several active lawsuits pending between us and
Medtronic, Inc. However, on January 23, 2009, we reached an agreement to stop
all litigation between us and Medtronic with respect to interventional
cardiology and endovascular repair cases. See Note L - Commitments and
Contingencies to our 2008 consolidated financial statements included
in Item 8 of this Annual Report for a description of these legal
proceedings.
Other
Businesses
Interventional
Cardiology (excluding coronary stent systems)
In
addition to coronary stent systems, our Interventional Cardiology business
markets balloon catheters, rotational atherectomy systems, guide wires, guide
catheters, embolic protection devices, and diagnostic catheters used in
percutaneous transluminal coronary angioplasty (PTCA) procedures; and ultrasound
and imaging systems. Our net sales of these products increased to $1.028
billion in 2008, as compared to $989 million in 2007, an increase of $39 million
or four percent. This increase was driven primarily by growth in our
ultrasound and imaging system franchise; including increased sales of our iLab®
Ultrasound Imaging System, which enhances the diagnosis and treatment of blocked
vessels and heart disorders. In addition, in November 2008, the FDA
approved our Apex™ PTCA dilatation catheter, used in treating atherosclerotic
lesions.
Peripheral
Interventions
Our
Peripheral Interventions business product offerings include stents, balloon
catheters, sheaths, wires and vena cava filters, which are used to diagnose and
treat peripheral vascular disease. Our 2008 net sales of these products
decreased slightly to $589 million in 2008, as compared to $597 million in
2007. The decrease was a result of U.S. sales declines of $34 million
in 2008 to $294 million, from $328 million in 2007, primarily as a result of
increased competition across most of the vascular interventional product
categories. Our international Peripheral Interventions business grew $26
million in 2008, as compared to 2007, due primarily to foreign currency
fluctuations. We continue to hold a strong worldwide position in the Peripheral
Interventions market and we are the market leader in multiple product
categories. Further, in the fourth quarter of 2008, we received FDA
approval for three new products: our Carotid WALLSTENT® Monorail®
Endoprosthesis for the treatment of patients with carotid artery disease who are
at high risk for surgery; our Express® SD Renal Monorail® premounted stent
system for use as an adjunct to percutaneous transluminal renal angioplasty in
certain lesions of the renal arteries; and our Sterling™ Monorail® and Over-the-Wire
balloon dilatation catheter for use in the renal and lower extremity
arteries.
Neurovascular
We market
a broad line of products used in treating diseases of the neurovascular system.
Our Neurovascular net sales increased to $360 million in 2008, as compared to
$352 million in 2007, an increase of $8 million or two percent. Our U.S. net
sales were $131 million in 2008, as compared to $127 million in 2007, and our
international net sales were $229 million in 2008, as compared to $225 million
in 2007. We plan to launch a next-generation family of detachable coils,
including an enhanced delivery system with reduced coil detachment times, in the
U.S. in the second half of 2009. Within our product pipeline, we are also
developing next-generation technologies for the treatment of aneurysms,
intracranial atherosclerotic disease and acute ischemic stroke, and are
involved in numerous clinical activities that are designed to expand the size of
the worldwide Neurovascular market.
47
Endosurgery
Our
Endosurgery group develops and manufactures devices to treat a variety of
medical conditions, including diseases of the digestive and pulmonary systems
within our Endoscopy division, and urological and gynecological disorders within
our Urology division. Our Endosurgery group net sales grew eight percent in 2008
to $1.374 billion, and accounted for 17 percent of our total net sales in 2008,
as compared to 15 percent in 2007. The following are the components
of our worldwide Endosurgery business:
|
(in
millions)
|
Year
Ended
December
31, 2008
|
Year
Ended
December
31, 2007
|
||||||||||||||||||||||
|
U.S.
|
International
|
Total
|
U.S.
|
International
|
Total
|
|||||||||||||||||||
|
Endoscopy
|
$ | 477 | $ | 466 | $ | 943 | $ | 453 | $ | 413 | $ | 866 | ||||||||||||
|
Urology
|
335 | 96 | 431 | 316 | 87 | 403 | ||||||||||||||||||
| $ | 812 | $ | 562 | $ | 1,374 | $ | 769 | $ | 500 | $ | 1,269 | |||||||||||||
Our Endoscopy net sales grew nine percent in 2008 to $943 million from $866 million in 2007. Key sales growth drivers within Endoscopy included our biliary franchise, which grew $45 million, or 16 percent, to $324 million on the strength of our SpyGlass® Direct Visualization System for single-operator duodenoscope assisted cholangiopancreatoscopy, or visual examination of the bile ducts, which was launched in the second quarter of 2007. In addition, our hemostasis franchise grew $16 million, or 18 percent, to $107 million on the strength of our Resolution® Clip Device, which is the only currently-marketed mechanical clip designed to open and close (up to five times) before deployment to enable a physician to see the effects of the clip before committing to deployment. Our Urology net sales grew seven percent in 2008 to $431 million from $403 million in 2007. This growth was primarily due to our pelvic floor franchise, which grew 17 percent, or $14 million, to $95 million, led by our line of sling-based devices and kits, which are used in the treatment of a variety of stress- and age-related disorders of the lower female anatomy. The remaining Urology growth was spread across the other components of our business, including our stone management and gynecology franchises. During 2009, we intend to launch a number of new products across multiple franchises in both our Endoscopy and Urology businesses.
Neuromodulation
Despite
new product launches during the year by both of our major competitors, our
Neuromodulation net sales increased to $245 million in 2008, as compared to $204
million in 2007, an increase of $41 million or 20 percent. Our U.S. net sales
were $234 million in 2008, as compared to $198 million in 2007, and our
international net sales were $11 million in 2008, as compared to $6 million in
2007. We continued to maintain our strong position within the U.S. market with
our Precision® Spinal Cord Stimulation (SCS) system, used for the treatment of
chronic pain of the lower back and legs. We believe that we continue to have a
technology advantage over our competitors with proprietary features such as
Multiple Independent Current Control, which allows the physician to target
specific areas of pain more precisely. In addition, we are currently
assessing the use of our SCS system to treat other sources of pain. These
factors, coupled with the move of our Neuromodulation business to a new
state-of-the-art facility during 2008, position us well for continued growth in
this market.
Innovation
Our
approach to innovation combines internally developed products and technologies
with those we obtain externally through strategic acquisitions and alliances.
Our research and development efforts are focused largely on the development of
next-generation and novel technology offerings across multiple programs and
48
divisions.
We expect to continue to invest in our CRM and drug-eluting stent technologies,
and will also invest selectively in areas outside of these markets. We expect to
continue to invest in our paclitaxel drug-eluting stent program, along with our
internally developed and manufactured everolimus-eluting stent program (the
PROMUS® Element™ stent system), to sustain our leadership position in the
worldwide drug-eluting stent market. 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
strategic acquisitions are intended to expand further our ability to offer our
customers safe, 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
may be dilutive to our earnings and may require additional debt or equity
financing, depending on their size and nature.
We have
entered strategic alliances with both publicly traded and privately held
companies. We enter these alliances to broaden our product technology portfolio
and to strengthen and expand our reach into existing and new markets. During
2008, we monetized certain investments and alliances no longer determined to be
strategic (see the Strategic
Initiatives section for more information). 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 strategic alliances.
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 sometimes 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. Accordingly, the
outcome of these reimbursement decisions could have an adverse impact on our
business. In addition, the current economic climate may impose further
pressure on funds available for reimbursement of healthcare and on reimbursement
levels.
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
49
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 CRM
products and drug-eluting stent systems. In addition, our products require
sterilization prior to sale and we rely primarily on third party vendors to
perform this service. To the extent our third party sterilizers
are unable to process our products, whether due to raw
material, capacity, regulatory or other constraints, we may be unable
to transition to other providers in a timely manner, which could have an
adverse impact on our operations.
International
Markets
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. International markets, including
Japan, are affected by economic pressure to contain reimbursement levels and
healthcare costs. 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 CFGs in lieu of their own regulatory
approval requirements. Although the corporate warning letter has not been
formally resolved, the FDA has approved all currently eligible requests for
CFGs. However, any limits on our ability to market our full line of existing
products and to launch new products within these jurisdictions could have an
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:
|
2008
versus 2007
|
2007
versus 2006
|
|||||||||||||||||||||||||||
|
(in
millions)
|
2008
|
2007
|
2006
|
As
Reported Currency
Basis
|
Constant
Currency
Basis
|
As
Reported Currency
Basis
|
Constant
Currency
Basis
|
|||||||||||||||||||||
|
United
States
|
$ | 4,487 | $ | 4,522 | $ | 4,415 | (1 | ) % | (1 | ) % | 2 | % | 2 | % | ||||||||||||||
|
EMEA
|
1,960 | 1,833 | 1,631 | 7 | % | 2 | % | 12 | % | 3 | % | |||||||||||||||||
|
Inter-Continental
|
1,534 | 1,449 | 1,299 | 6 | % | (2 | ) % | 12 | % | 9 | % | |||||||||||||||||
|
International
|
3,494 | 3,282 | 2,930 | 6 | % | - | % | 12 | % | 6 | % | |||||||||||||||||
|
Subtotal
|
7,981 | 7,804 | 7,345 | 2 | % | - | % | 6 | % | 4 | % | |||||||||||||||||
|
Divested
businesses
|
69 | 553 | 476 | N/A | N/A | N/A | N/A | |||||||||||||||||||||
|
Worldwide
|
$ | 8,050 | $ | 8,357 | $ | 7,821 | (4 | ) % | (6 | ) % | 7 | % | 5 | % | ||||||||||||||
The
following table provides our worldwide net sales by division and the relative
change on an as reported basis:
50
|
2008
versus 2007
|
2007
versus 2006
|
|||||||||||||||||||||||||||
|
(in
millions)
|
2008
|
2007
|
2006
|
As
Reported
Currency
Basis
|
Constant
Currency
Basis
|
As
Reported
Currency
Basis
|
Constant
Currency
Basis
|
|||||||||||||||||||||
|
Interventional
Cardiology
|
$ | 2,879 | $ | 3,016 | $ | 3,509 | (5 | ) % | (7 | ) % | (14 | ) % | (15 | ) % | ||||||||||||||
|
Peripheral
Interventions
|
589 | 597 | 624 | (1 | ) % | (5 | ) % | (4 | ) % | (8 | ) % | |||||||||||||||||
|
Cardiovascular
|
||||||||||||||||||||||||||||