WWW.EXFILE.COM, INC. -- 15113 -- BOSTON SCIENTIFIC CORP. -- FORM 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF
1934
|
|
For
the quarterly period ended: March 31,
2007
|
Commission
file number: 1-11083
BOSTON
SCIENTIFIC CORPORATION
(Exact
name of registrant as specified in its charter)
DELAWARE
|
04-2695240
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
of
incorporation or organization)
|
Identification
No.)
|
One
Boston Scientific Place, Natick,
Massachusetts
|
01760-1537
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone
number, including area code: (508)
650-8000
Former
name, former address and former fiscal year, if changed since last
report.
Indicate
by check mark whether the registrant (1) has filed all reports required
to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the
preceding 12 months (or for such shorter period that the registrant
was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x No
o
Indicate
by check mark whether the registrant is an accelerated filer (as defined
in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the last practicable date.
Class
|
Shares
Outstanding
as
of April 30,
2007
|
|
|
Common
Stock, $.01 Par Value
|
1,483,197,814
|
Page
1 of
46 Pages
Exhibit
Index on Page 45
TABLE
OF CONTENTS
|
|
Page
No.
|
PART
I
|
FINANCIAL
INFORMATION
|
3 |
|
|
|
Item
1.
|
Condensed
Consolidated Financial Statements
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Operations
|
3
|
|
|
|
|
Condensed
Consolidated Balance Sheets
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
5
|
|
|
|
|
Notes
to the Condensed Consolidated Financial Statements
|
6
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results
of
Operations
|
25
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
43
|
|
|
|
Item
4.
|
Controls
and Procedures
|
43
|
|
|
|
|
|
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
45
|
|
|
|
Item
1.
|
Legal
Proceedings
|
45
|
|
|
|
Item
1A.
|
Risk
Factors |
45
|
|
|
|
Item
6.
|
Exhibits
|
|
|
|
|
|
|
|
SIGNATURES
|
|
46
|
|
|
|
PART
I
FINANCIAL
INFORMATION
ITEM
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BOSTON
SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
Three
Months Ended
March
31,
|
|
(in
millions, except per share data)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,086
|
|
|
$ |
1,620
|
|
Cost
of products sold
|
|
|
568
|
|
|
|
374
|
|
Gross
profit
|
|
|
1,518
|
|
|
|
1,246
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
735
|
|
|
|
470
|
|
Research
and development expenses
|
|
|
289
|
|
|
|
186
|
|
Royalty
expense
|
|
|
52
|
|
|
|
55
|
|
Amortization
expense
|
|
|
155
|
|
|
|
38
|
|
Purchased
research and development
|
|
|
5
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,236
|
|
|
|
749
|
|
Operating
income
|
|
|
282
|
|
|
|
497
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(141 |
) |
|
|
(37 |
) |
Other,
net
|
|
|
18
|
|
|
|
(29 |
) |
Income
before income taxes
|
|
|
159
|
|
|
|
431
|
|
Income
taxes
|
|
|
39
|
|
|
|
99
|
|
Net
income
|
|
$ |
120
|
|
|
$ |
332
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share — basic
|
|
$ |
0.08
|
|
|
$ |
0.40
|
|
Net
income per common share — assuming dilution
|
|
$ |
0.08
|
|
|
$ |
0.40
|
|
See
notes
to the unaudited condensed consolidated financial statements.
BOSTON
SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
March
31,
|
|
|
December
31,
|
|
(in
millions, except share data)
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,340
|
|
|
$ |
1,668
|
|
Trade
accounts receivable, net
|
|
|
1,435
|
|
|
|
1,424
|
|
Inventories
|
|
|
793
|
|
|
|
749
|
|
Deferred
income taxes
|
|
|
581
|
|
|
|
583
|
|
Prepaid
expenses and other current assets
|
|
|
435
|
|
|
|
477
|
|
Total
current assets
|
|
$ |
4,584
|
|
|
$ |
4,901
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,748
|
|
|
|
1,726
|
|
Investments
|
|
|
563
|
|
|
|
596
|
|
Other
assets
|
|
|
214
|
|
|
|
237
|
|
Intangible
assets, net
|
|
|
23,960
|
|
|
|
23,636
|
|
|
|
$ |
31,069
|
|
|
$ |
31,096
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Current
debt obligations
|
|
$ |
7
|
|
|
$ |
7
|
|
Accounts
payable and accrued expenses
|
|
|
1,925
|
|
|
|
2,067
|
|
Other
current liabilities
|
|
|
438
|
|
|
|
556
|
|
Total
current liabilities
|
|
$ |
2,370
|
|
|
$ |
2,630
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
8,898
|
|
|
|
8,895
|
|
Deferred
income taxes
|
|
|
2,645
|
|
|
|
2,784
|
|
Other
long-term liabilities
|
|
|
1,607
|
|
|
|
1,489
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $ .01 par value - authorized 50,000,000
shares, none issued and
outstanding
|
|
Common
stock, $ .01 par value - authorized 2,000,000,000
shares and issued
1,486,403,445 shares at March 31, 2007
and December 31,
2006
|
|
|
15
|
|
|
|
15
|
|
Treasury
stock, at cost - 4,076,138
shares at March 31, 2007
and 11,728,643 shares at
December 31, 2006
|
|
|
(115 |
) |
|
|
(334 |
) |
Additional
paid-in capital
|
|
|
15,679
|
|
|
|
15,734
|
|
Retained
deficit
|
|
|
(80 |
) |
|
|
(174 |
) |
Other
stockholders’ equity
|
|
|
50
|
|
|
|
57
|
|
Total
stockholders’ equity
|
|
|
15,549
|
|
|
|
15,298
|
|
|
|
$ |
31,069
|
|
|
$ |
31,096
|
|
|
|
|
|
|
|
|
|
|
See
notes
to the unaudited condensed consolidated financial statements.
BOSTON
SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
Cash
(used for) provided by operating activities
|
|
$ |
(59 |
) |
|
$ |
564
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Net
purchases of property, plant and equipment
|
|
|
(96 |
) |
|
|
(44 |
) |
Proceeds
from maturities of marketable securities
|
|
|
|
|
|
|
159
|
|
Proceeds
from sales of privately held and publicly traded
equity
securities
|
|
|
14
|
|
|
|
|
|
Payments
for acquisitions of businesses, net of cash acquired
|
|
|
(11 |
) |
|
|
|
|
Payments
relating to prior period acquisitions
|
|
|
(200 |
) |
|
|
(210 |
) |
Payments
for investments in companies and acquisitions of
certain
technologies
|
|
|
(7 |
) |
|
|
(752 |
) |
Cash
used for investing activities
|
|
|
(300 |
) |
|
|
(847 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
Net
payments on commercial paper
|
|
|
|
|
|
|
(149 |
) |
Net
proceeds from revolving borrowings, notes payable,
capital leases and
long-term borrowings
|
|
|
|
|
|
|
799
|
|
Proceeds
from issuances of shares of common stock
|
|
|
31
|
|
|
|
27
|
|
Cash
provided by financing activities
|
|
|
31
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(328 |
) |
|
|
394
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,668
|
|
|
|
689
|
|
Cash
and cash equivalents at end of period
|
|
$ |
1,340
|
|
|
$ |
1,083
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
Stock
issued for acquisitions
|
|
$ |
91
|
|
|
|
|
|
See
notes
to the unaudited condensed consolidated financial statements.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
A – BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements of Boston
Scientific Corporation have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary
for fair presentation have been included. Operating results for the three
months ended March 31, 2007 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2007. For further information,
refer to the consolidated financial statements and footnotes thereto
incorporated by reference in our Annual Report on Form 10-K for the year ended
December 31, 2006.
On
April
21, 2006, we consummated our acquisition of Guidant Corporation. Prior to our
acquisition of Guidant, Abbott Laboratories acquired Guidant's vascular
intervention and endovascular solutions businesses and agreed to share the
drug-eluting technology it acquired from Guidant with us.
See our 2006 Annual Report filed on Form 10-K for
further details regarding these transactions.
In
March
2007, we announced that our Board of Directors has authorized management to
explore an Initial Public Offering (IPO) of a minority interest in our
Endosurgery group. An IPO would involve selling a minority interest of the
Endosurgery group and establishing a separately traded public company. The
new
company would remain a majority-owned subsidiary of Boston Scientific and would
continue to be consolidated with Boston Scientific for financial reporting
purposes.
NOTE
B – BUSINESS COMBINATIONS
In
January 2007, we acquired 100 percent of the fully diluted equity of EndoTex
Interventional Systems, Inc., a developer of stents used in the treatment of
stenotic lesions in the carotid arteries. In conjunction with the acquisition
of
EndoTex, we paid approximately $102 million, which included approximately five
million shares of our common stock valued at approximately $91 million and
cash
of $11 million, in addition to our previous investments and notes issued of
approximately $40 million, plus future consideration that is contingent upon
EndoTex achieving certain performance-related milestones. The acquisition was
intended to expand our carotid artery disease technology portfolio.
In
addition, during the first quarter of 2007, we paid approximately $200 million
to the former shareholders of Advanced Bionics Corporation for
acquisition-related payments, which were accrued for at December 31, 2006.
Certain of our business combinations involve the payment of contingent
consideration. Certain earn-out payments are based on multiples of the acquired
company’s revenue during the earn-out period and, consequently, we cannot
currently determine the total payments. However, we have developed an estimate
of the maximum potential contingent consideration for each of our acquisitions
with an outstanding earn-out obligation. At March 31, 2007, the estimated
maximum potential amount of future contingent consideration (undiscounted)
that
we could be required to make associated with our business combinations is
approximately $4 billion, some of which may be payable in common stock, and
which includes approximately $3 billion of estimated payments to Advanced
Bionics. The milestones associated with the contingent consideration must be
reached in certain future periods ranging from 2007 through 2016. The estimated
cumulative specified revenue level associated with these maximum future
contingent payments is approximately $10 billion, which includes
approximately $7 billion for Advanced Bionics.
During
2006, we paid $28.4 billion to acquire Guidant through a combination of cash,
common stock, and fully vested stock options. The purchase price is based upon
estimates of the fair value of assets acquired and liabilities
assumed.
The
following chart summarizes the Guidant purchase price allocation at March 31,
2007:
|
(in
millions)
|
|
|
|
|
Cash
|
|
$ |
6,708
|
|
|
Intangible
assets subject to amortization
|
|
|
7,719
|
|
|
Goodwill
|
|
|
12,592
|
|
|
Other
assets
|
|
|
2,259
|
|
|
Purchased
research and development
|
|
|
4,169
|
|
|
Current
liabilities
|
|
|
(2,022 |
) |
|
Net
deferred income taxes
|
|
|
(2,475 |
) |
|
Other
long-term liabilities
|
|
|
(592 |
) |
|
|
|
$ |
28,358
|
|
Adjustments
to the Guidant purchase price allocation during the first quarter of 2007
consisted primarily of changes in our estimates for the costs associated with
product liability claims and litigation, changes in the liability for
unrecognized tax benefits resulting from the adoption of FASB Interpretation
No.
48, Accounting for Uncertainty in Income Taxes, as well as changes in
our estimate for Guidant-related exit costs, as described
below.
Costs
Associated with Exit Activities
Included
in the Guidant purchase price allocation at March 31, 2007 is an accrual for
$112 million in acquisition-related costs that included approximately $102
million for involuntary terminations, change-in-control payments, relocation
and
related costs, and approximately $10 million of estimated costs to cancel
contractual commitments.
As
of the
acquisition date, management began to assess and formulate plans to exit certain
Guidant activities. As a result of these exit plans, we will make
severance, relocation and change-in-control payments. The majority of the exit
cost accrual relates to our first quarter 2007 reduction of the
acquired Cardiac Rhythm Management (CRM) workforce by approximately 500 to
600 employees. The affected workforce included primarily research and
development employees, although employees within sales and marketing and certain
other functions were also impacted. We also made smaller workforce
reductions internationally across multiple functions in order to eliminate
duplicate facilities and rationalize our distribution network in certain
countries. During the first quarter of 2007, we reduced our estimate
for Guidant-related exit costs in conjunction with finalizing the purchase
price
allocation and recorded an adjustment to goodwill to reflect the change in
estimate. We expect that the amounts accrued at March 31, 2007 will
be paid prior to December 31, 2007.
The
components of our accrual for Guidant-related exit and other costs are as
follows:
(in
millions)
|
|
Balance
at
December
31,
2006
|
|
|
Purchase
Price
Adjustments
|
|
|
Charges
Utilized
|
|
|
Balance
at
March
31,
2007
|
|
Workforce
reductions
|
|
$ |
163
|
|
|
$ |
(46 |
) |
|
$ |
(22 |
) |
|
$ |
95
|
|
Relocation
costs
|
|
|
10
|
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
7
|
|
Contractual
commitments
|
|
|
25
|
|
|
|
(14 |
) |
|
|
(1 |
) |
|
|
10
|
|
|
|
$ |
198
|
|
|
$ |
(62 |
) |
|
$ |
(24 |
) |
|
$ |
112
|
|
Pro
Forma Results of Operations
The
following unaudited pro forma information presents a summary of consolidated
results of our operations and Guidant, as if the acquisition, the Abbott
transaction and the financing for the acquisition had occurred at January 1,
2006. We have adjusted the historical consolidated financial information to
give
effect to pro forma events that are (i) directly attributable to the
acquisition and (ii) factually supportable. We present the pro forma
unaudited condensed consolidated financial information for informational
purposes only. The pro forma information is not necessarily indicative of what
the financial position or results of operations actually would have been had
the
acquisition, the sale of the Guidant vascular and endovascular solutions
businesses to Abbott and the financing transactions with Abbott and other
lenders been completed at January 1, 2006. Pro forma adjustments are
tax-effected at our effective tax rate.
(in
millions, except per share data)
|
|
Three
Months Ended
March
31, 2006
|
|
|
|
|
|
Net
sales
|
|
$ |
2,228
|
|
Net
loss
|
|
|
(4,418 |
) |
|
|
|
|
|
Net
loss per share - basic
|
|
$ |
(3.02 |
) |
Net
loss per share - assuming dilution
|
|
$ |
(3.02 |
) |
The
pro
forma net loss includes amortization expense associated with intangible assets
obtained in conjunction with the Guidant acquisition of $120 million for the
first quarter of 2006 and also includes the following non-recurring charges:
purchased research and development of $4.169 billion obtained as part of the
Guidant acquisition; $224 million in expense associated with the step-up value
of acquired inventory sold; a tax charge for the drug-eluting stent license
right obtained from Abbott; and $87 million for the fair value adjustment
related to the sharing of proceeds feature of the Abbott stock purchase. In
connection with the accounting for the acquisition of Guidant, we wrote-up
inventory acquired from manufacturing cost to fair value.
NOTE
C – COMPREHENSIVE INCOME
The
following table provides a summary of our comprehensive income:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
Net
income
|
|
$ |
120
|
|
|
$ |
332
|
|
Foreign
currency translation adjustment
|
|
|
(1 |
) |
|
|
14
|
|
Net
change in derivative financial instruments
|
|
|
(1 |
) |
|
|
(2 |
) |
Net
change in equity investments
|
|
|
(5 |
) |
|
|
(14 |
) |
Comprehensive
income
|
|
$ |
113
|
|
|
$ |
330
|
|
NOTE
D – EARNINGS PER SHARE
The
following table sets forth the computations of basic and diluted earnings per
share:
|
|
Three
Months
Ended
|
|
|
|
March
31,
|
|
(in
millions,
except
per
share
data)
|
|
2007
|
|
|
2006
|
|
Basic
|
|
|
|
|
|
|
Net
income
|
|
$ |
120
|
|
|
$ |
332
|
|
Weighted
average
shares
outstanding
|
|
|
1,481.3
|
|
|
|
821.3
|
|
Net
income
per
common
share
|
|
$ |
0.08
|
|
|
$ |
0.40
|
|
|
|
|
|
|
|
|
|
|
Assuming
dilution
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
120
|
|
|
|
332
|
|
Weighted
average
shares
outstanding
|
|
|
1,481.3
|
|
|
|
821.3
|
|
Net
effect
of
common
stock
equivalents
|
|
|
16.5
|
|
|
|
9.1
|
|
Total
|
|
|
1,497.8
|
|
|
|
830.4
|
|
Net
income
per
common
share
|
|
$ |
0.08
|
|
|
$ |
0.40
|
|
Potential
common stock equivalents of 37 million for the first quarter of 2007 and 17
million for the first quarter of 2006 were excluded from the computation of
earnings per share, assuming dilution, because the exercise prices were greater
than the average market price of our common stock during the
quarter.
NOTE
E – STOCK-BASED COMPENSATION
The
following presents the impact of stock-based compensation expense on our
unaudited condensed consolidated statement of operations:
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
Cost
of products sold
|
|
$ |
4
|
|
|
$ |
6
|
|
Selling,
general and administrative expenses
|
|
|
23
|
|
|
|
20
|
|
Research
and development expenses
|
|
|
7
|
|
|
|
6
|
|
Income
before income taxes
|
|
|
34
|
|
|
|
32
|
|
Income
tax benefit
|
|
|
10
|
|
|
|
9
|
|
Net
income
|
|
$ |
24
|
|
|
$ |
23
|
|
NOTE
F – INVENTORIES
The
components of inventory consist of the following:
|
|
March
31,
|
|
|
December
31,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
471
|
|
|
$ |
447
|
|
Work-in-process
|
|
|
158
|
|
|
|
145
|
|
Raw
materials
|
|
|
164
|
|
|
|
157
|
|
|
|
$ |
793
|
|
|
$ |
749
|
|
NOTE
G – BORROWINGS AND CREDIT ARRANGEMENTS
Our
revolving credit facility and term loan agreement requires that we maintain
a
ratio of debt to pro forma EBITDA, as defined by the agreement, of less than
or
equal to 4.5 to 1.0 through December 31, 2007 and 3.5 to 1.0 thereafter. The
agreement also requires that we maintain a ratio of pro forma EBITDA, as defined
by the agreement, to interest expense of greater than or equal to 3.0 to 1.0.
As
of March 31, 2007, we were in compliance with both of these covenants. Exiting
the quarter, our ratio of debt to pro forma EBITDA was 3.9 to 1.0 and the ratio
of pro forma EBITDA to interest expense was 4.3 to 1.0. Any breach of these
covenants would require that we obtain waivers from our lenders and there can
be
no assurance that our lenders would grant such waivers.
Our
credit ratings are BBB- from Fitch Ratings; Baa3 from Moody's Investor Service;
and BBB from Standard & Poor's Rating Services. These credit ratings are
investment grade. The ratings outlook by the three rating agencies is currently
negative. Credit rating changes do not trigger an event of default
as defined by our borrowing arrangements.
NOTE
H – COMMITMENTS AND CONTINGENCIES
The
medical device market in which we primarily participate
is largely technology driven. Physician customers, particularly in
interventional cardiology, have historically moved quickly to new products
and
new technologies. As a result, intellectual property rights, particularly
patents and trade secrets, play a significant role in product development and
differentiation. However, intellectual property litigation to
defend
or
create market advantage is inherently complex and unpredictable. Furthermore,
appellate courts frequently overturn lower court patent decisions.
In
addition, competing parties frequently file multiple suits to leverage patent
portfolios across product lines, technologies and geographies and to balance
risk and exposure between the parties. In some cases, several competitors are
parties in the same proceeding, or in a series of related proceedings, or
litigate multiple features of a single class of devices. These forces frequently
drive settlement not only of individual cases, but also of a series of pending
and potentially related and unrelated cases. In addition, although monetary
and
injunctive relief is typically sought, remedies and restitution are generally
not determined until the conclusion of the proceedings and are frequently
modified on appeal. Accordingly, the outcomes of individual cases are difficult
to time, predict or quantify and are often dependent upon the outcomes of other
cases in other geographies.
Several
third parties have asserted that our current and former stent systems infringe
patents owned or licensed by them. We have similarly asserted that stent systems
or other products sold by these companies infringe patents owned or licensed
by
us. Adverse outcomes in one or more of the proceedings against us could limit
our ability to sell certain stent products in certain jurisdictions, or reduce
our operating margin on the sale of these products.
We
are
substantially self-insured with respect to general, product liability and
securities claims. In the normal course of business, product liability and
securities claims are asserted against us. Product liability and securities
claims against us may be asserted in the future related to events not known
to
management at the present time. The absence of significant third-party insurance
coverage increases our potential exposure to unanticipated claims or adverse
decisions. Product liability claims, product recalls, securities litigation
and
other litigation in the future, regardless of their outcome, could have a
material adverse effect on our financial position, results of operations or
liquidity.
We
accrue
anticipated costs of settlement and damages and, under certain conditions,
costs
of defense, based on historical experience or to the extent specific losses
are
probable and estimable. We record losses for claims in excess of the limits
of
purchased insurance in earnings at the time and to the extent they are probable
and estimable. If the estimate of a probable loss is a range and no amount
within the range is more likely, we accrue the minimum amount of the range. In
connection with our acquisition of Guidant, the number of legal claims against
us, including product liability, private securities and shareholder derivative
claims, significantly increased. Our accrual for legal matters that are probable
and estimable was $732 million at March 31, 2007 and $485 million at
December 31, 2006, and includes costs of settlement, damages
and defense. The amounts accrued relate primarily to assumed Guidant
litigation and claims recorded as part of the purchase price. In connection
with the acquisition of Guidant, we continue to assess certain assumed
litigation and claims to determine the amounts that
management believes will be paid as a result of such claims and litigation
and, therefore, additional losses may be accrued in the future, which could
adversely impact our operating results and our ability to comply with our debt
covenants.
In
management’s opinion, we are not currently involved in any legal proceedings
other than those specifically identified below, which, individually or in the
aggregate, could have a material effect on our financial condition, operations
and/or cash flows. Unless included in our legal accrual or otherwise indicated
below, a range of loss associated with any individual material legal proceeding
can not be estimated.
Except
as
disclosed below, there have been no material developments with regards to any
matters of litigation or other proceedings disclosed in our 2006 Annual Report
on Form 10-K.
Litigation
with Johnson & Johnson
On
October 22, 1997, Cordis Corporation, a subsidiary of Johnson &
Johnson, filed a suit for patent infringement against us and SCIMED Life
Systems, Inc., our wholly owned subsidiary, alleging that the importation
and use of the NIR® stent infringes two patents owned by Cordis. On
April 13, 1998, Cordis filed a suit for patent infringement against us and
SCIMED alleging that our NIR® stent infringes two additional patents owned by
Cordis. The suits were filed in the U.S. District Court for the District of
Delaware seeking monetary damages, injunctive relief and that the patents be
adjudged valid, enforceable and infringed. A trial on both actions was held
in
late 2000. A jury found that the NIR® stent does not infringe three Cordis
patents, but does infringe one claim of one Cordis patent and awarded damages
of
approximately $324 million to Cordis. On March 28, 2002, the Court set
aside the damage award, but upheld the remainder of the verdict, and held that
two of the four patents had been obtained through inequitable conduct in the
U.S. Patent and Trademark Office. On May 27, 2005, Cordis filed an appeal on
those two patents and an appeal hearing was held on May 3, 2006. The Court
of Appeals remanded the case back to the trial court for further briefing
and fact-finding by the Court. On May 16, 2002, the Court also set
aside the verdict of infringement, requiring a new trial. On March 24,
2005, in a second trial, a jury found that a single claim of the Cordis patent
was valid and infringed. The jury determined liability only; any monetary
damages will be determined at a later trial. On March 27, 2006, the judge
entered judgment in favor of Cordis, and on April 26, 2006, we filed an appeal.
A hearing on the appeal has not yet been scheduled. Even though it is
reasonably possible that we may incur a liability associated with this case,
we
do not believe that a loss is probable or estimable. Therefore, we have not
accrued for any losses associated with this case.
On
April 2, 1997, Ethicon and other Johnson & Johnson subsidiaries
filed a cross-border proceeding in The Netherlands alleging that the NIR® stent
infringes a European patent licensed to Ethicon. In this action, the
Johnson & Johnson entities requested relief, including provisional
relief (a preliminary injunction). In October 1997, Johnson &
Johnson's request for provisional cross-border relief on the patent was denied
by the Dutch Court, on the ground that it is “very likely” that the NIR® stent
will be found not to infringe the patent. Johnson & Johnson's appeal of
this decision was denied. In January 1999, Johnson & Johnson
amended the claims of the patent and changed the action from a cross-border
case
to a Dutch national action. On June 23, 1999, the Dutch Court affirmed that
there were no remaining infringement claims with respect to the patent and
also
asked the Dutch Patent Office for technical advice about the validity of the
amended patent. In late 1999, Johnson & Johnson appealed this decision.
On March 11, 2004, the Court of Appeals nullified the Dutch Court's
June 23, 1999 decision and the proceedings have been returned to the Dutch
Court. In accordance with its 1999 decision, the Dutch Court asked the Dutch
Patent Office for technical advice on the validity of the amended patent. On
August 31, 2005, the Dutch Patent Office issued its technical advice that
the amended patent was valid but left certain legal issues for the Dutch Court
to resolve. A hearing has been scheduled for December 21, 2007.
On
August 22, 1997, Johnson & Johnson filed a suit for patent
infringement against Boston Scientific alleging that the sale of the NIR® stent
infringes certain Canadian patents owned by Johnson & Johnson. Suit was
filed in the federal court of Canada seeking a declaration of infringement,
monetary damages and injunctive relief. On December 2, 2004, the Court
dismissed the case, finding all patents to be invalid. On December 6, 2004,
Johnson & Johnson appealed the Court's decision, and in May 2006, the
Court reinstated the patent. In August 2006, we appealed the Court's decision
to
the Supreme Court. On January 18, 2007, the Supreme Court denied review. A
trial
has been scheduled for January 21, 2008.
On
March 26, 2002, we and Target Therapeutics, Inc., our wholly owned
subsidiary, filed suit for patent infringement against Cordis alleging that
certain detachable coil delivery systems and/or pushable coil vascular occlusion
systems (coil delivery systems) infringe three U.S. patents, owned by or
exclusively licensed to Target. The complaint was filed in the U.S. District
Court for the Northern District of
California
seeking monetary and injunctive relief. In 2004, the Court granted summary
judgment in our favor finding infringement of one of the patents. On
November 14, 2005, the Court denied Cordis' summary judgment motions with
respect to the validity of the patent. Cordis filed a motion for reconsideration
and a hearing was held on October 26, 2006. The Court ruled on Cordis' motion
for reconsideration by modifying its claim construction order. On February
9,
2007, Cordis filed a motion for summary judgment of non-infringement with
respect to one of the patents and a hearing on Cordis' motion was held on May
4,
2007. A trial has not yet been scheduled.
On
January 13, 2003, Cordis filed suit for patent infringement against us and
SCIMED alleging that our Express 2™
coronary
stent
infringes a U.S. patent owned by Cordis. The suit was filed in the U.S. District
Court for the District of Delaware seeking monetary and injunctive relief.
We
answered the complaint, denying the allegations and filed a counterclaim
alleging that certain Cordis products infringe a patent owned by us. On
August 4, 2004, the Court granted a Cordis motion to add our Liberté™
coronary stent and two additional patents to the complaint. On June 21,
2005, a jury found that our TAXUS® Express 2™, Express
2 , Express™
Biliary, and Liberté stents infringe a Johnson & Johnson patent and
that the Liberté stent infringes a second Johnson & Johnson patent. The
juries only determined liability; monetary damages will be determined at a
later
trial. We filed a motion to set aside the verdict and enter judgment in its
favor as a matter of law. On May 11, 2006, our motion was denied. With respect
to our counterclaim, a jury found on July 1, 2005 that Johnson &
Johnson's Cypher®, Bx Velocity®, Bx Sonic™ and Genesis™ stents infringe our
patent. Johnson & Johnson filed a motion to set aside the verdict and
enter judgment in its favor as a matter of law. On May 11, 2006, the Court
denied Johnson & Johnson's motion. Johnson & Johnson’s motion for
reconsideration was denied on March 27, 2007. On April 17, 2007, Johnson &
Johnson filed a second motion to set aside the verdict and enter judgment as
a
matter of law or, in the alternative, a new trial on infringement. Even though
it is reasonably possible that we will incur a liability associated with this
case, we do not believe that a loss is probable or estimable. Therefore, we
have
not accrued for any losses associated with this case.
On
March 13, 2003, we, and Boston Scientific Scimed, Inc., filed suit for
patent infringement against Johnson & Johnson and Cordis, alleging that
its Cypher drug-eluting stent infringes one of our patents. The suit was filed
in the U.S. District Court for the District of Delaware seeking monetary and
injunctive relief. Cordis answered the complaint, denying the allegations,
and
filed a counterclaim against us alleging that the patent is not valid and is
unenforceable. We subsequently filed amended and new complaints in the U.S.
District Court for the District of Delaware alleging that the Cypher
drug-eluting stent infringes four of our additional patents (Additional
Patents). Following the announcement on February 23, 2004 by Guidant
Corporation of an agreement with Johnson & Johnson and Cordis to sell
the Cypher drug-eluting stent, we amended our complaint to include Guidant
and
certain of its subsidiaries as co-defendants as to certain patents in
suit. We may replace Abbott Laboratories for Guidant as a party in
the suit as a result of Abbott's purchase of Guidant's vascular interventions
and endovascular solutions businesses. In March 2005, we filed a
stipulated dismissal as to three of the four Additional Patents. On July 1,
2005, a jury found that Johnson & Johnson's Cypher drug-eluting stent
infringes one of our patents and upheld the validity of the patent. The jury
determined liability only; any monetary damages will be determined at a later
trial. Johnson & Johnson filed a motion to set aside the verdict and enter
judgment in its favor as a matter of law. On June 15, 2006, the Court denied
Johnson & Johnson's motion. Johnson & Johnson has moved for
reconsideration of the Court's decision. A summary judgment hearing as to the
remaining patent was held on June 14, 2006. On April 4, 2007, the Court granted
summary judgment of non-infringement of the remaining patent.
On
December 24, 2003, we (through our subsidiary Schneider Europe GmbH) filed
suit against the Belgian subsidiaries of Johnson & Johnson, Cordis and
Janssen Pharmaceutica alleging that Cordis' Bx Velocity stent, Bx Sonic stent,
Cypher stent, Cypher Select stent, Aqua T3™ balloon and U-Pass balloon infringe
one of our European patents. The suit was filed in the District Court of
Brussels, Belgium
seeking
preliminary cross-border, injunctive and monetary relief and sought an expedited
review of the claims by the Court. A separate suit was filed in the District
Court of Brussels, Belgium against nine additional Johnson & Johnson
subsidiaries. The Belgium Court linked all Johnson & Johnson entities
into a single action but dismissed the case for failure to satisfy the
requirements for expedited review without commenting on the merits of the
claims. On August 5, 2004, we refiled the suit on the merits against the
same Johnson & Johnson subsidiaries in the District Court of Brussels,
Belgium seeking injunctive and monetary relief for infringement of the same
European patent. A hearing is scheduled for September 20, 2007. In
December 2005, the Johnson & Johnson subsidiaries filed a nullity
action in France and, in January 2006, the same Johnson & Johnson
subsidiaries filed nullity actions in Italy and Germany. We have filed a
counterclaim infringement action in Italy.
On
May 12, 2004, we filed suit against two of Johnson &
Johnson's Dutch subsidiaries, alleging that Cordis' Bx Velocity stent, Bx Sonic
stent, Cypher stent, Cypher Select stent, and Aqua T3 balloon delivery systems
for those stents, and U-Pass angioplasty balloon catheters infringe one of
our
European patents. The suit was filed in the District Court of The Hague in
The
Netherlands seeking injunctive and monetary relief. On June 8, 2005, the
Court found the Johnson & Johnson products infringe our patent and
granted injunctive relief. On June 23, 2005, the District Court in Assen.
The Netherlands stayed enforcement of the injunction. On October 12, 2005,
a Dutch Court of Appeals overturned the Assen court's ruling and reinstated
the
injunction against the manufacture, use and sale of the Cordis products in
The
Netherlands. Damages for Cordis' infringing acts in The Netherlands will be
determined at a later date. Cordis appealed the validity and infringement ruling
by The Hague Court. A hearing on this appeal was held on November 2, 2006 and
a
decision was received on March 15, 2007 finding the patent valid but not
infringed. We have filed an appeal.
On
September 25, 2006, Johnson & Johnson filed a lawsuit against us, Guidant
and Abbott in the U.S. District Court for the Southern District of New York.
The
complaint alleges that Guidant breached certain provisions of the amended merger
agreement between Johnson & Johnson and Guidant (Merger Agreement) as well
as the implied duty of good faith and fair dealing. The complaint further
alleges that we and Abbott tortiously interfered with the Merger Agreement
by
inducing Guidant's breach. The complaint seeks certain factual findings, damages
in an amount no less than $5.5 billion and attorneys' fees and costs. We and
Guidant filed a motion to dismiss the complaint on November 15, 2006. Johnson
& Johnson filed its opposition to the motion on January 9, 2007, and
defendants filed their reply on January 31, 2007. A hearing on the motion to
dismiss was held on February 28, 2007. The judge took the matter under
advisement, and stayed discovery pending his decision on the
motion.
On
February 1, 2005, we and Angiotech Pharmaceuticals, Inc. filed suit
against Conor Medsystems, Inc., a subsidiary of Johnson and Johnson, in The
Hague, The Netherlands seeking a declaration that Conor's drug-eluting stent
products infringe patents owned by Angiotech and licensed to us. A hearing
was
held on October 27, 2006, and a decision was rendered on January 17, 2007 in
favor of Angiotech and us. The Court granted an injunction against Conor,
prohibiting it from selling its paclitaxel-eluting stent in The Netherlands,
and
also ordered Conor to pay damages. On April 17, 2007, Conor appealed this
decision.
Litigation
Relating to St. Jude Medical, Inc.
Guidant
Sales Corp., Cardiac Pacemakers, Inc. (CPI) and Mirowski Family Ventures LLC
are
plaintiffs in a patent infringement suit originally filed against St. Jude
Medical and its affiliates in November 1996 in the District Court in
Indianapolis. In July 2001, a jury found that a patent licensed to CPI and
expired in December 2003, was valid but not infringed by certain of St. Jude
Medical's defibrillator products. In February 2002, the District Court reversed
the jury's finding of validity. In August 2004, the Federal Circuit Court of
Appeals, among other things, reinstated the jury verdict of validity and
remanded the
matter
for a new trial on infringement and damages. The case was sent back to the
District Court for further proceedings. Pursuant to a Settlement Agreement
dated
July 29, 2006 between us and St. Jude Medical, the parties agreed to limit
the
scope and available remedies of this case. On March 26, 2007, the District
Court
issued a ruling invalidating the patent.
Litigation
with Medinol Ltd.
On
September 25, 2002, we filed suit against Medinol alleging Medinol's
NIRFlex™ and NIRFlex™ Royal products infringe a patent owned by us. The suit was
filed in the District Court of The Hague, The Netherlands seeking cross-border,
monetary and injunctive relief. On September 10, 2003, the Dutch Court
ruled that the patent was invalid. We appealed the Court's decision in
December 2003. A hearing on the appeal was held on August 17, 2006. On
December 14, 2006, a decision was rendered upholding the trial court ruling.
We
appealed the Court’s decision on March 14, 2007.
On
January 26, 2007, Medinol filed a Vindication Action against us in the German
District Court of Munich, Germany. The complaint alleges, and seeks a ruling,
that Medinol be deemed the owner of one of our patents covering coronary stent
designs. We are in the process of evaluating this matter and will respond to
the
action on or before May 31, 2007.
Other
Patent Litigation
On
July 28, 2000, Dr. Tassilo Bonzel filed a complaint naming certain
of our Schneider Worldwide subsidiaries and Pfizer Inc. and certain of
its affiliates as defendants, alleging that Pfizer failed to pay Dr. Bonzel
amounts owed under a license agreement involving Dr. Bonzel’s patented
Monorail® balloon catheter technology. The suit was filed in the U.S. District
Court for the District of Minnesota seeking monetary relief. On
September 26, 2001, we reached a contingent settlement with
Dr. Bonzel involving all but one claim asserted in the complaint. The
contingency was satisfied and the settlement is final. On
December 17, 2001, the remaining claim was dismissed without prejudice with
leave to refile the suit in Germany. Dr. Bonzel filed an appeal of the
dismissal of the remaining claim. On July 29, 2003, the Appellate Court
affirmed the lower court’s dismissal, and on October 24, 2003, the
Minnesota Supreme Court denied Dr. Bonzel’s petition for further review. On
March 26, 2004, Dr. Bonzel filed a similar complaint against us,
certain of our subsidiaries and Pfizer in the Federal District Court for
the District of Minnesota. We answered, denying the allegations of the
complaint. We filed a motion to dismiss the case, and the case was
dismissed with prejudice on November 2, 2004. On February 7,
2005, Dr. Bonzel appealed the Court’s decision. On March 2, 2006, the
Federal District Court dismissed the appeal and affirmed the lower court’s
decision. On April 24, 2007, we received a letter from Dr. Bonzel's
counsel alleging that the 1995 license agreement with Dr. Bonzel may have
been invalid under German law. We are investigating the allegations
contained in this letter and will respond to Dr. Bonzel's counsel.
On
December 16, 2003, The Regents of the University of
California filed suit against Micro Therapeutics, Inc., a subsidiary
of ev3, and Dendron GmbH alleging that Micro Therapeutics' Sapphire™ detachable
coil delivery systems infringe twelve patents licensed to us and owned by The
Regents. The complaint was filed in the U.S. District Court for the Northern
District of California seeking monetary and injunctive relief. On
January 8, 2004, Micro Therapeutics and Dendron filed a third-party
complaint to include us and Target as third-party defendants seeking a
declaratory judgment of invalidity and noninfringement with respect to the
patents and antitrust violations. On February 17, 2004, we, as a
third-party defendant, filed a motion to dismiss us from the case. On
July 9, 2004, the Court granted our motion in part and dismissed us and
Target from the claims relating only to patent infringement, while denying
dismissal of an antitrust claim. On April 7, 2006, the Court denied Micro
Therapeutics' motion seeking unenforceability of The Regents' patent and denied
The Regents' cross-motion for summary judgment of unenforceability. A trial
is
scheduled for October 16, 2007.
On
May 19, 2005, G. David Jang, M.D. filed suit against us alleging breach of
contract relating to certain patent rights assigned to our covering stent
technology. The suit was filed in the U.S. District Court, Central District
of
California seeking monetary damages and rescission of the contract. On
June 24, 2005, we answered, denying the allegations, and filed a
counterclaim. After a Markman ruling relating to the Jang patent rights, Dr.
Jang stipulated to the dismissal of certain claims alleged in the complaint
with
a right to appeal. In February 2007, the parties agreed to settle the other
claims of the case, and in May 2007 the parties executed a written settlement
agreement.
On
April
4, 2007, SciCo Tec GmbH, filed suit against us alleging certain of our balloon
catheters infringe a U.S. patent owned by SciCo Tec GmbH. The suit
was filed in the United States District Court for the Eastern District of Texas
seeking monetary and injunctive relief. We will answer the complaint,
denying the allegations.
On
April
19, 2007, SciCo Tec GmbH, filed suit against us and our subsidiary, Boston
Scientific Nedizintechnik GmbH, alleging certain balloon catheters infringe
a
German patent owned by SciCo Tec GmbH. The suit was filed in
Mannheim, Germany. We will answer the complaint, denying the
allegations.
Other
Proceedings
On
January 10, 2002 and January 15, 2002, Alan Schuster and Antoinette
Loeffler, respectively, putatively initiated shareholder derivative lawsuits
for
and on our behalf in the U.S. District Court for the Southern District of New
York against our then current directors and us as nominal defendant. Both
complaints allege, among other things, that with regard to our relationship
with
Medinol, the defendants breached their fiduciary duties to us and our
shareholders in our management and affairs, and in the use and preservation
of
our assets. The suits seek a declaration of the directors' alleged breach,
damages sustained by us as a result of the alleged breach and monetary and
injunctive relief. On October 18, 2002, the plaintiffs filed a consolidated
amended complaint naming two senior officials as defendants and us as nominal
defendant. The action was stayed in February 2003 pending resolution of a
separate lawsuit brought by Medinol against us. After the resolution of the
Medinol lawsuit, plaintiffs, on May 1, 2006, were permitted to file an amended
complaint to supplement the allegations in the prior consolidated amended
complaint based mainly on events that occurred subsequent to the parties'
agreement to stay the action. The defendants filed a motion to dismiss the
amended complaint on or about June 30, 2006. The motion was denied without
prejudice on October 18, 2006, and the Court ordered that the amended complaint
be deemed a demand for our Board of Directors to consider taking action in
connection with the allegations of the amended complaint. On February 20, 2007,
the Board of Directors responded, rejecting plaintiffs’
demand. Defendants filed a renewed motion to dismiss the amended
complaint on March 13, 2007.
On
September 8, 2005, the Laborers Local 100 and 397 Pension Fund initiated a
putative shareholder derivative lawsuit on our behalf in the Commonwealth of
Massachusetts Superior Court Department for Middlesex County against our
directors, certain of our current and former officers and us as nominal
defendant. The complaint alleged, among other things, that with regard to
certain matters of regulatory compliance, the defendants breached their
fiduciary duties to us and our shareholders in the management and affairs of
our
business and in the use and preservation of our assets. The complaint also
alleged that as a result of the alleged misconduct and the purported failure
to
publicly disclose material information, certain directors and officers sold
our
stock at inflated prices in violation of their fiduciary duties and were
unjustly enriched. The suits sought a declaration of the directors' and
officers' alleged breaches, unspecified damages sustained by us as a result
of
the alleged breaches and other unspecified equitable and injunctive relief.
On
September 15, 2005, Benjamin Roussey also initiated a putative shareholder
derivative lawsuit in the same Court alleging similar misconduct and seeking
similar relief. Following
consolidation
of the cases, the defendants filed a motion to dismiss the consolidated
derivative complaint. Our motion to dismiss was granted without leave to amend
on September 11, 2006. On September 21, 2006, plaintiff Laborers Local 100
and
397 Pension Fund filed a motion to alter or amend judgment and for leave to
file
an amended complaint which was denied on October 19, 2006. The Board of
Directors thereafter received two letters from the Laborers Local 100 and 397
Pension Fund dated February 21, 2007. One letter demanded that the
Board of Directors investigate and commence action against the defendants named
in the original complaint in connection with the matters alleged in the original
complaint. The second letter (as well as subsequent letters from the Pension
Fund) made a demand for an inspection of certain books and records for the
purpose of, among other things, the investigation of possible breaches of
fiduciary duty, misappropriation of information, abuse of control, gross
mismanagement, waste of corporate assets and unjust enrichment. On March 21,
2007, we rejected the request to inspect books and records on the ground that
Laborers Local 100 and 397 Pension Fund had not established a proper purpose
for
the request.
On
September 23, 2005, Srinivasan Shankar, on behalf of himself and all others
similarly situated, filed a purported securities class action suit in the U.S.
District Court for the District of Massachusetts on behalf of those who
purchased or otherwise acquired our securities during the period March 31,
2003 through August 23, 2005, alleging that we and certain of our officers
violated certain sections of the Securities Exchange Act of 1934. On
September 28, 2005, October 27, 2005, November 2, 2005 and
November 3, 2005, Jack Yopp, Robert L. Garber, Betty C. Meyer and John
Ryan, respectively, on behalf of themselves and all others similarly situated,
filed additional purported securities class action suits in the same Court
on
behalf of the same purported class. On February 15, 2006, the Court
ordered that the five class actions be consolidated and appointed the
Mississippi Public Employee Retirement System Group as lead plaintiff. A
consolidated amended complaint was filed on April 17, 2006. The consolidated
amended complaint alleges that we made material misstatements and omissions
by
failing to disclose the supposed merit of the Medinol litigation and DOJ
investigation relating to the 1998 NIR ON® Ranger with Sox stent recall,
problems with the TAXUS® drug-eluting coronary stent systems that led to product
recalls, and our ability to satisfy FDA regulations concerning medical device
quality. The consolidated amended complaint seeks unspecified damages, interest,
and attorneys' fees. The defendants filed a motion to dismiss the consolidated
amended complaint on June 8, 2006 which was granted by the Court on March 30,
2007. On April 27, 2007, plaintiffs appealed the Court’s decision.
On
January 19, 2006, George Larson, on behalf of himself and all others
similarly situated, filed a purported class action complaint in the U.S.
District Court for the District of Massachusetts on behalf of participants
and
beneficiaries of our 401(k) Retirement Savings Plan (401(k) Plan) and GESOP
(together the Plans) alleging that we and certain of our officers and employees
violated certain provisions under the Employee Retirement Income Security Act
of
1974, as amended (ERISA) and Department of Labor Regulations. On
January 26, 2006, February 8, 2006, February 14, 2006,
February 23, 2006 and March 3, 2006, Robert Hochstadt, Jeff Klunke, Kirk
Harvey, Michael Lowe and Douglas Fletcher, respectively, on behalf of themselves
and others similarly situated, filed purported class action complaints in the
same Court on behalf of the participants and beneficiaries in our Plans alleging
similar misconduct and seeking similar relief as in the Larson lawsuit. On
April
3, 2006, the Court issued an order consolidating the actions and appointing
Jeffrey Klunke and Michael Lowe as interim lead plaintiffs. On August 23, 2006,
plaintiffs filed a consolidated complaint that purports to bring a class action
on behalf of all participants and beneficiaries of our 401(k) Plan during the
period May 7, 2004 through January 26, 2006 alleging that we, our 401(k)
Administrative and Investment Committee (the Committee), members of the
Committee, and certain directors violated certain provisions of ERISA. The
complaint alleges, among other things, that the defendants breached their
fiduciary duties to the 401(k) Plan's participants. The complaint seeks
equitable and monetary relief. Defendants filed a motion to dismiss on October
10, 2006. Plaintiffs filed their opposition memorandum on December 15,
2006, and defendants filed their reply on January 16, 2007. A hearing has
not yet been scheduled.
We
are a
defendant in two lawsuits involving the TAXUS Express2 paclitaxel-eluting
coronary stent system in which the plaintiffs are seeking class certification.
On November 16, 2006, Michael Seaburn and Beatriz Seaburn filed suit in the
U.S.
District Court for the Southern District of Florida on behalf of themselves
and
a purported class of plaintiffs resident in the United States. On January 23,
2007, Ronald E. and Tammy Coterill filed suit in the U.S. District Court for
the
District of Idaho on behalf of themselves and a purported class of plaintiffs
resident in the state of Idaho or any contiguous state. Both complaints seek
certification of class status and also seek compensatory damages for personal
injury, restitution of the purchase price, disgorgement of our profits
associated with the sale of TAXUS stent systems, and, in the Idaho case,
injunctive relief in the form of medical monitoring. We have answered both
complaints and intend to vigorously defend against each of their
allegations.
On
June 12, 2003, Guidant announced that its subsidiary, EndoVascular
Technologies, Inc. (EVT), had entered into a plea agreement with the U.S.
Department of Justice relating to a previously disclosed investigation regarding
the ANCURE ENDOGRAFT System for the treatment of abdominal aortic aneurysms.
At
the time of the EVT plea, Guidant had outstanding fourteen suits alleging
product liability related causes of action relating to the ANCURE System.
Subsequent to the EVT plea, Guidant was notified of additional claims and served
with additional complaints. From time to time, Guidant has settled certain
of
the individual claims and suits for amounts that were not material to Guidant.
Currently, Guidant has 18 filed lawsuits outstanding, and more suits may be
filed. Additionally, Guidant has been notified of over 150 unfiled claims that
are pending. The cases generally allege the plaintiffs suffered injuries, and
in
certain cases died, as a result of purported defects in the device or the
accompanying warnings and labeling. The complaints seek damages, including
punitive damages.
While
insurance may reduce Guidant's exposure with respect to ANCURE System claims,
one of Guidant's carriers, Allianz Insurance Company (Allianz), filed suit
in
the Circuit Court, State of Illinois, County of DuPage, seeking to rescind
or
otherwise deny coverage and alleging fraud. Additional carriers have intervened
in the case and Guidant affiliates, including EVT, are also named as defendants.
Guidant and its affiliates also have initiated suit against certain of its
carriers, including Allianz, in the Superior Court, State of Indiana, County
of
Marion, in order to preserve Guidant's rights to coverage. The lawsuits are
virtually identical and proceeding in both state courts. A trial has not yet
been scheduled in the Illinois case. A trial is expected to begin in late 2007
or early 2008 in the Indiana case. On March 23, 2007, the Court in the Indiana
lawsuit granted Guidant and its affiliates’ motion for partial summary judgment
on Allianz's duty to defend. On April 19, 2007, Allianz filed a notice of
appeal of that ruling.
Shareholder
derivative suits relating to the ANCURE System are currently pending in the
Southern District of Indiana and in the Superior Court of the State of Indiana,
County of Marion. The suits, purportedly filed on behalf of Guidant, initially
alleged that Guidant's directors breached their fiduciary duties by taking
improper steps or failing to take steps to prevent the ANCURE and EVT related
matters described above. The complaints seek damages and other equitable relief.
The state court derivative suits have been stayed in favor of the federal
derivative action. On March 9, 2007, the Superior Court granted the parties’
joint motion to dismiss the complaint with prejudice for lack of standing in
one
of the pending state derivative actions.. The plaintiff in the federal
derivative case filed an amended complaint in December 2005, adding allegations
regarding defibrillator and pacemaker products and Guidant's proposed merger
with Johnson & Johnson. On January 23, 2006, Guidant and its
directors moved to dismiss the amended complaint. On March 17, 2006, a second
amended complaint in the federal derivative case was filed. On May 1, 2006,
the
defendants moved to dismiss the second amended complaint. This motion remains
pending.
In
July
2005, a purported class action complaint was filed on behalf of participants
in
Guidant's employee pension benefit plans. This action was filed in the U.S.
District Court for the Southern District of Indiana
against
Guidant and its directors. The complaint alleges breaches of fiduciary duty
under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. §
1132. Specifically, the complaint alleges that Guidant fiduciaries
concealed adverse information about Guidant's defibrillators and imprudently
made contributions to Guidant's 401(k) plan and employee stock ownership plan
in
the form of Guidant stock. The complaint seeks class certification, declaratory
and injunctive relief, monetary damages, the imposition of a constructive trust,
and costs and attorneys' fees. A second, similar complaint was filed and
consolidated with the initial complaint. A consolidated, amended complaint
was
filed on February 8, 2006. The defendants moved to dismiss the consolidated
complaint, and on September 15, 2006, the Court dismissed the complaint for
lack
of jurisdiction. In October 2006, the Plaintiffs appealed the Court's decision
to the United States Court of Appeals for the Seventh Circuit. A hearing was
held on April 10, 2007. This appeal remains pending.
Approximately
80 product liability class action lawsuits and more than 1,350 individual
lawsuits are pending in various state and federal jurisdictions against Guidant
alleging personal injuries associated with defibrillators or pacemakers involved
in the 2005 and 2006 product communications. The majority of the cases in the
United States are pending in federal court but 105 cases are currently
pending in state courts. On November 7, 2005, the Judicial Panel on
Multi-District Litigation established MDL-1708 (MDL) in the United States
District Court for the District of Minnesota and appointed a single judge to
preside over all the cases in the MDL. The MDL Court scheduled the first federal
court trial for July 30, 2007. An additional nine lawsuits are pending in
Canada. Of these nine suits in Canada, six are putative class actions and three
are individual lawsuits. On June 13, 2006, the Minnesota Supreme Court appointed
a single judge to preside over all Minnesota state court lawsuits involving
cases arising from the recent product communications. The first state court
trial has been scheduled in Minnesota for January 28, 2008.
In
April
2006, the personal injury plaintiffs and certain third-party payors served
a
Master Complaint in the MDL asserting claims for class action certification,
alleging claims of strict liability, negligence, fraud, breach of warranty
and
other common law and/or statutory claims and seeking punitive damages. The
majority of claimants allege no physical injury, but are suing for medical
monitoring and anxiety. Pursuant to an agreement between the parties, the cases
originally scheduled to be tried in Texas state court in September 2006 are
no
longer set for trial. In 2006, the FDA's Office of Criminal Investigations
issued a subpoena to the plaintiffs' attorneys involved in this trial asking
plaintiffs' counsel to turn over documents they have received from Guidant
as
part of the civil litigation discovery process. To date, Guidant has also been
informed of over 4,300 claims of individuals that may or may not mature into
filed suits.
Guidant
has received requests for information in the form of Civil Investigative Demands
(CID) from the attorneys general of Arizona, California, Oregon, Illinois,
Vermont and Louisiana. These attorneys general advise that approximately
twenty-nine other states and the District of Columbia are cooperating in these
CID demands. The CIDs pertain to whether Guidant violated any applicable state
laws, primarily state consumer protection laws, in connection with the sale
and
promotion of certain of its implantable defibrillators. Guidant is cooperating
with these investigations.
On
November 2, 2005, the Attorney General of the State of New York filed a
civil complaint against Guidant pursuant to the New York's Consumer Protection
Law (N.Y. Executive Law § 63(12)). In the complaint, the Attorney General
alleges that Guidant concealed from physicians and patients a design flaw in
its
PRIZM 1861 defibrillator from approximately February of 2002 until May 23,
2005. The complaint further alleges that due to Guidant's concealment of this
information, Guidant has engaged in repeated and persistent fraudulent conduct
in violation of N.Y. Executive Law § 63(12). The Attorney General is seeking
permanent injunctive relief, restitution for patients in whom a PRIZM 1861
defibrillator manufactured before April 2002 was implanted, disgorgement of
profits, and all other proper
relief.
This case is currently pending in the MDL in the United States District Court
for the District of Minnesota.
Approximately
seventy former employees have filed charges against Guidant with the U.S. Equal
Employment Opportunity Commission (EEOC). Most of the charges were filed in
the
Minneapolis Area Office. The charges allege that Guidant discriminated against
the former employees on the basis of their age when Guidant terminated their
employment in August 2004 in conjunction with Guidant's reduction in force.
In
September 2006, the EEOC found probable cause to support the allegations in
the
charges pending before it. Separately, in April 2006, approximately sixty of
these former employees also sued Guidant in federal district court for the
District of Minnesota, alleging that Guidant discriminated against the former
employees on the basis of their age when Guidant terminated their employment
in
August 2004 in conjunction with a reduction in force. All but one of the
plaintiffs in the federal court action signed a full and complete release of
claims that included any claim based on age discrimination, shortly after their
employments ended in 2004. The parties conducted discovery in the fall of 2006
regarding the issue of the validity of those releases and have since filed
cross
motions for summary judgment on this issue. A hearing on the summary judgment
motions was held on February 21, 2007, and on April 4, 2007, the Court issued
a
decision in which it held that the releases did not bar the plaintiffs from
pursuing their claims of age discrimination.against Guidant. Guidant requested
that the Court grant permission to appeal this decision to the United States
Court of Appeals for the Eighth Circuit. If the Court grants such
permission, the parties will follow a special appeals process that will last
a
number of months before the Eighth Circuit renders a decision on the validity
of
the releases.
Guidant
is a defendant in two separate complaints in which plaintiffs allege a right
of
recovery under the Medicare secondary payer (or MSP) private right of action,
as
well as related claims. Plaintiffs claim as damages double the amount paid
by
Medicare in connection with devices that were the subject of recent voluntary
field actions. Both of these cases were pending in the MDL in the United States
District Court for the District of Minnesota. We moved to dismiss one of the
suits and the plaintiff filed an opposition to this motion. The Court
held a hearing on the motion to dismiss the MSP claim on March 6, 2007 which
was
granted on April 16, 2007. Guidant expects to file a motion to
dismiss the second MSP claim during the second quarter of 2007 based on the
Court’s recent ruling relating to the first MSP claim.
Guidant or its affiliates are defendants in
four
separate actions brought by private third-party providers of health benefits
or
health insurance (TPPs). In these cases, plaintiffs allege various theories
of
recovery, including derivative tort claims, subrogation, violation of consumer
protection statutes and unjust enrichment, for the cost of healthcare benefits
they allegedly paid for in connection with the devices that have been the
subject of Guidant’s voluntary
field
actions.
Two
of
these actions were pending in the multi-district litigation in the federal
district court in Minnesota (MDL) as part of a single `master complaint,' filed
on April 24, 2006, which also includes other types of claims by other
plaintiffs. The two named TPP plaintiffs in the master complaint claim to
represent a putative nationwide class of TPPs. These two TPP plaintiffs
had previously filed separate complaints against Guidant. Guidant
moved to dismiss the MDL TPP claims in the master complaint for lack of standing
and for failure to state a claim. A hearing was held on March 6,
2007, and on April 16, 2007, the MDL Court granted Guidant’s motion to dismiss,
dismissing the claims of both TPP plaintiffs in the MDL. While most
of the claims were dismissed with prejudice, the subrogation claims brought
by
the TPP plaintiffs were dismissed without prejudice and may later be
reasserted.
The
other
two TPP actions are pending in state court in Minnesota, and are part of
the coordinated state court proceeding ordered by the Minnesota Supreme Court.
The plaintiffs in one of these cases are a number of Blue Cross & Blue
Shield plans, while the plaintiffs in the other case are a national health
insurer and its affiliates. The complaints in these cases were served
on Guidant on May 18 and June 25, 2006, respectively. Guidant has moved to
dismiss both cases. Hearings on the motions have not yet been
scheduled.
In
January 2006, Guidant was served with a civil False Claims Act qui tam
lawsuit filed in the U.S. District Court for the Middle District of
Tennessee in September 2003 by Robert Fry, a former employee alleged to
have worked for Guidant from 1981 to 1997. The lawsuit claims that Guidant
violated
federal law and the laws of the States of Tennessee, Florida and California,
by
allegedly concealing limited warranty and other credits for upgraded or
replacement medical devices, thereby allegedly causing hospitals to file
reimbursement claims with federal and state healthcare programs for amounts
that
did not reflect the providers’ true costs for the devices. On April 25, 2006,
the Court denied Guidant's motion to dismiss the complaint, but ordered the
relator to file a second amended complaint. On May 4, 2006, the relator filed
a
second amended complaint. On May 24, 2006, Guidant moved to dismiss that
complaint, which motion was denied by the Court on September 13, 2006. On
October 16, 2006, the United States filed a motion to intervene in this action,
which was approved by the Court on November 2, 2006. To date, no state has
intervened in this case.
In
2005,
the Securities and Exchange Commission began a formal inquiry into issues
related to certain of Guidant's product disclosures and trading in Guidant
stock. Guidant has cooperated with the inquiry.
On
November 3, 2005, a securities class action complaint was filed on behalf
of purchasers of Guidant stock between December 1, 2004 and October 18, 2005
in
the U.S. District Court for the Southern District of Indiana, against Guidant
and several of its officers and directors. The complaint alleges that the
defendants concealed adverse information about Guidant's defibrillators and
pacemakers and sold stock in violation of federal securities laws. The complaint
seeks a declaration that the lawsuit can be maintained as a class action,
monetary damages, and injunctive relief. Several additional, related securities
class actions were filed in November 2005 and January 2006, and were
consolidated with the initial complaint filed on November 3, 2005. The
Court issued an order consolidating the complaints and appointed the Iron
Workers of Western Pennsylvania Pension Plan and David Fannon as lead
plaintiffs. Lead plaintiffs filed a consolidated amended complaint. In August
2006, the defendants moved to dismiss the complaint.
In
October 2005, Guidant received administrative subpoenas from the U.S. Department
of Justice U.S. Attorney's offices in Boston and Minneapolis, issued under
the Health Insurance Portability & Accountability Act of 1996. The
subpoena from the U.S. Attorney's office in Boston requests documents concerning
marketing practices for pacemakers, implantable cardioverter defibrillators,
leads and related products. The subpoena from the U.S. Attorney's office in
Minneapolis requests documents relating to Guidant's VENTAK PRIZM 2 and CONTAK
RENEWAL and CONTAK RENEWAL 2 devices. Guidant is cooperating in these
matters.
On
May 3,
2006, Emergency Care Research Institute (ECRI) filed a complaint against Guidant
in the U.S. District Court for the Eastern District of Pennsylvania generally
seeking a declaration that ECRI may publish confidential pricing information
about Guidant's medical devices. The complaint seeks, on constitutional and
other grounds, a declaration that confidentiality clauses contained in contracts
between Guidant and its customers are not binding and that ECRI does not
tortiously interfere with Guidant's contractual relations by obtaining and
publishing Guidant pricing information. Guidant's motion to transfer the matter
to Minnesota was denied and discovery is proceeding in the Eastern District
of
Pennsylvania. A trial is expected to be scheduled in late 2007 or early
2008.
On
July
17, 2006, Carla Woods and Jeffrey Goldberg, as Trustees of the Bionics Trust
and
Stockholders' Representative, filed a lawsuit against us in the U.S. District
Court for the Southern District of New York. The complaint alleges that we
breached the Agreement and Plan of Merger among us, Advanced Bionics
Corporation, the Bionics Trust, Alfred E. Mann, Jeffrey H. Greiner, and David
MacCallum, collectively in their capacity as Stockholders' Representative,
and
others dated May 28, 2004 (the Merger Agreement) or, alternatively, the covenant
of good faith and fair dealing. The complaint seeks injunctive and other relief.
On February 20, 2007, the district court entered a preliminary injunction
prohibiting us from taking certain actions until we complete specific actions
described in the Merger Agreement. We appealed the preliminary injunction order
on March 16, 2007. On April 17, 2007, the district court issued a
permanent
injunction. On May 7, 2007, we appealed the permanent injunction
order.
On
January 16, 2007, the French Conseil de la Concurrence (one of the bodies
responsible for the enforcement of antitrust/competition law in France) issued
a
Statement of Objections alleging that Guidant had agreed with the four other
main suppliers of ICDs in France to collectively refrain from responding to
a
2001 tender for ICDs conducted by a group of 17 University Hospital Centers
in
France. This alleged collusion is said to be contrary to the French Commercial
Code and Article 81 of the European Community Treaty. Guidant France filed
a
response to the Statement of Objections on March 29, 2007.
On
February 28, 2007, we received a letter from the Congressional Committee on
Oversight and Government Reform requesting information relating to our TAXUS
stent systems. The Committee’s request expressly related to concerns
about the safety and off label use of drug-eluting stents raised by a recent
FDA
panel. We are one of two device companies asked to provide information
about research and marketing activities relating to drug-eluting
stents. We are cooperating with the Committee regarding its
request.
FDA
Warning Letters
On
December 23, 2005, Guidant received an FDA warning letter citing certain
deficiencies with respect to its manufacturing quality systems and
record-keeping procedures in its CRM facility in St. Paul, Minnesota. In 2007,
following recent reinspections of our CRM facilities, we received notification
that the FDA had lifted the warning letter and removed associated
restrictions.
On
January 26, 2006, legacy Boston Scientific received a corporate warning
letter from the FDA, notifying us of serious regulatory problems at three
facilities and advising us that our corrective action plan relating to
three site-specific warning letters issued to us in 2005 was inadequate. As
also stated in this FDA warning letter, the FDA may not grant our requests
for
exportation certificates to foreign governments or approve pre-market approval
applications for class III devices to which the quality control or
current good manufacturing practices deficiencies described in the letter are
reasonably related until the deficiencies have been corrected.
NOTE
I – INCOME TAXES
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes. As a result of the
implementation of Interpretation No. 48, we recognized approximately $128
million increase in our liability for unrecognized tax
benefits. Approximately $28 million of this increase was reflected as
a reduction to the January 1, 2007 balance of retained
earnings. Substantially all of the remaining increase related to
pre-acquisition uncertain tax liabilities related to Guidant and was recorded
as
an increase to goodwill in accordance with purchase accounting pursuant to
Emerging Issues Task Force (EITF) Issue No. 93-7, Uncertainties Related to
Income Taxes in a Purchase Business Combination. At the adoption
date of January 1, 2007, we had $1.155 billion of gross unrecognized tax
benefits, $360 million of which, if recognized, would affect our effective
tax
rate. At March 31, 2007, we had $1.180 billion of gross unrecognized
tax benefits, $385 million of which, if recognized, would affect our effective
tax rate.
We
are
subject to U.S. federal income tax as well as income tax of multiple state
and
foreign jurisdictions. We have concluded all U.S. federal income tax
matters through 1997. Substantially all material state,
local,
and foreign income tax matters have been concluded for all years through 2001,
except for a Japanese appeals court case with respect to the 1995 to 1998
tax periods.
In
the
next twelve months, we expect to resolve multiple issues with the
IRS. We also expect to receive the appellate court decision on
the Japan matter during 2007. As a result of settlement of these
matters we anticipate that our reserve for uncertain tax positions could change
by up to $208 million in the next twelve months.
Our
historical practice was and continues to be to recognize interest and penalties
related to income tax matters in income tax expense. We had $221
million accrued for interest and penalties at adoption of Interpretation No.
48
and $241 million at March 31, 2007.
NOTE
J – SEGMENT REPORTING
We
have
four reportable operating segments based on geographic regions: the United
States, Europe, Japan and Inter-Continental. Each of our reportable segments
generates revenues from the sale of less-invasive medical devices. The
reportable segments represent an aggregate of all operating divisions within
each segment. We measure and evaluate our reportable segments based on segment
income. This segment income excludes certain corporate and manufacturing
expenses associated with divisions that do not meet the definition of a segment,
as defined by FASB Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information. In addition, certain transactions or
adjustments that our chief operating decision maker considers to be
non-recurring and/or non-operational, as well as stock-based compensation and
amortization expense, are excluded from segment income. Although we exclude
these amounts from segment income, they are included in reported consolidated
net income and are included in the reconciliation below.
Sales
and
operating results of reportable segments are based on internally derived
standard foreign exchange rates, which may differ from year to year and do
not
include intersegment profits. We have restated the segment information for
2006
net sales and operating results based on our standard foreign exchange rates
used for 2007. Because of the interdependence of the reportable segments, the
operating profit as presented may not be representative of the geographic
distribution that would occur if the segments were not interdependent. We base
enterprise-wide information on actual foreign exchange rates used in our
unaudited condensed consolidated financial statements.
(in
millions)
|
|
United
States
|
|
|
Europe
|
|
|
Japan
|
|
|
Inter-
Continental
|
|
|
Total
|
|
Three
months ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,271
|
|
|
$ |
433
|
|
|
$ |
170
|
|
|
$ |
183
|
|
|
$ |
2,057
|
|
Segment
income
|
|
|
388
|
|
|
|
224
|
|
|
|
96
|
|
|
|
87
|
|
|
|
795
|
|
Three
months ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
991
|
|
|
$ |
321
|
|
|
$ |
142
|
|
|
$ |
175
|
|
|
$ |
1,629
|
|
Segment
income
|
|
|
463
|
|
|
|
180
|
|
|
|
79
|
|
|
|
88
|
|
|
|
810
|
|
A
reconciliation of the totals reported for the reportable segments to the
applicable line items in our consolidated financial statements is as
follows:
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
Net
sales
|
|
|
|
|
|
|
Total
net sales allocated to reportable segments
|
|
$ |
2,057
|
|
|
$ |
1,629
|
|
Foreign
exchange
|
|
|
29
|
|
|
|
(9 |
) |
|
|
$ |
2,086
|
|
|
$ |
1,620
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
Total
operating income allocated to reportable segments
|
|
$ |
795
|
|
|
$ |
810
|
|
Manufacturing
operations
|
|
|
(161 |
) |
|
|
(125 |
) |
Corporate
expenses and foreign exchange
|
|
|
(146 |
) |
|
|
(118 |
) |
Acquisition-related
and other costs
|
|
|
(17 |
) |
|
|
|
|
Amortization
and stock-based compensation expense
|
|
|
(189 |
) |
|
|
(70 |
) |
|
|
|
282
|
|
|
|
497
|
|
Other
income (expense)
|
|
|
(123 |
) |
|
|
(66 |
) |
|
|
$ |
159
|
|
|
$ |
431
|
|
NOTE
K – NEW ACCOUNTING PRONOUNCEMENTS
Statement
No. 159
In
February 2007, the FASB issued Statement No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115, which allows an entity to elect to record financial
assets and liabilities at fair value upon their initial recognition on a
contract-by-contract basis. Subsequent changes in fair value would be recognized
in earnings as the changes occur. Statement No. 159 also establishes additional
disclosure requirements for these items stated at fair value. Statement No.
159
is effective for our 2008 fiscal year, with early adoption permitted, provided
that we also adopt Statement No. 157, Fair Value Measurements. We
are currently evaluating the impact that the adoption of Statement No. 159
will
have on our consolidated financial statements.
Issue
No. 06-3
In
June
2006, the FASB ratified EITF Issue No. 06−3, How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation).The scope of this
consensus includes any taxes assessed by a governmental authority that are
directly imposed on a revenue producing transaction between a seller and a
customer and may include, but are not limited to, sales, use, value-added,
and
some excise taxes. Per the consensus, the presentation of these taxes on either
a gross (included in revenues and costs) or a net (excluded from revenues)
basis
is an accounting policy decision that should be disclosed. We present sales
net
of sales taxes in our unaudited condensed consolidated statements of operations.
Issue No. 06−3 is effective for interim and annual reporting periods beginning
after December 15, 2006. No change of presentation is anticipated as a result
of
our adoption of Issue No. 06−3.
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Boston
Scientific Corporation is a worldwide developer, manufacturer and marketer
of
medical devices that are used in a broad range of interventional medical
specialties. Our mission is to improve the quality of patient care and the
productivity of healthcare delivery through the development and advocacy of
less-invasive medical devices and procedures. We accomplish this mission through
the continuing refinement of existing products and procedures and the
investigation and development of new technologies that can reduce risk, trauma,
cost, procedure time and the need for aftercare. Our approach to innovation
combines internally developed products and technologies with those we obtain
externally through our strategic acquisitions and alliances. Building
relationships with development-stage companies and investors allows us to deepen
our current franchises as well as expand into complementary businesses. Our
quality policy, applicable to all employees, is “I improve the quality of
patient care and all things Boston Scientific.”
Our
first
quarter 2007 operating results include the results of our Cardiac Rhythm
Management (CRM) and Cardiac Surgery businesses that were acquired as part
of
Guidant on April 21, 2006.
Financial
Summary
Our
net
sales for the first quarter of 2007 increased to $2.086 billion from $1.620
billion for the first quarter of 2006, an increase of 29 percent. The increase
in net sales is attributable primarily to the inclusion of $589 million of
net
sales from our CRM and Cardiac Surgery divisions. Our reported net income for
the first quarter of 2007 was $120 million, or $0.08 per diluted share, as
compared to net income of $332 million, or $0.40 per diluted share, for the
first quarter of 2006. Our reported results for the first quarter of 2007
included charges (after-tax) of $26 million, or $0.02 per share, which consisted
primarily of charges related to the Guidant acquisition. Our reported results
for the first quarter of 2006 included charges (after-tax) of $29 million,
or
$0.03 per share, which consisted primarily of investment write-downs due to
the
termination of a gene therapy trial being conducted by one of our portfolio
companies.
Outlook
CRM
Business
CRM
revenue represented approximately 25 percent of our consolidated net sales
for
the first quarter of 2007. We estimate that the worldwide CRM market will
approximate $10 billion in 2007 as compared to approximately $9 billion in
2006
and estimate that U.S. implantable cardioverter defibrillator (ICD) sales
represent approximately 40 percent of the worldwide CRM market in both 2007
and
2006. During the first quarter of 2007, we achieved double-digit sequential
growth in worldwide CRM sales for the second consecutive quarter. Worldwide
CRM
sales increased to $539 million for the first quarter of 2007 as compared to
$489 million for the fourth quarter of 2006. On a pro forma basis, as though
we
had acquired Guidant on January 1, 2006, our CRM sales decreased by four percent
from approximately $562 million for the first quarter of 2006 due to a slight
decline in market share. We believe the lower market share, as well
as the reduced market growth rates, were due primarily to previous field actions
in the industry. However, we believe the double-digit sequential
increase in our net sales is a sign that our market share has increased
and the CRM market is stabilizing and may have returned to growth. We
expect that growth rates in the worldwide CRM market, and the U.S. ICD market,
will
recover over several years. However, there can be no assurance that
these markets will return to their historical growth rates or that we will
be able to regain CRM market share or increase net sales in a timely manner,
if
at all. The most significant variables that may impact the size of the CRM
market and our position within that market include:
·
|
future
product field actions or new physician advisories by us or our
competitors;
|
·
|
variations
in clinical results, reliability or product performance of our and
our
competitors’ products;
|
·
|
our
ability to reestablish the trust and confidence of the implanting
community, the referring community and prospective patients in our
technology;
|
·
|
our
ability to retain our sales force and other key
personnel;
|
·
|
delayed
or limited regulatory approvals;
|
·
|
our
ability to launch next-generation products and technology features
in a
timely manner, if at all;
|
·
|
economic
and regulatory conditions;
|
·
|
new
competitive launches;
|
·
|
unfavorable
reimbursement policies;
|
·
|
declines
in average selling prices;
|
·
|
the
overall number of procedures performed;
and
|
·
|
the
outcome of legal proceedings related to our CRM
business.
|
In
April
2007, following recent FDA reinspections of our CRM facilities, we received
notification that the FDA had lifted its warning letter issued to Guidant in
December 2005 and removed associated restrictions. The reinspections
included an assessment of our implementation of quality system improvements
and
the FDA inspectors noted no observations during their reinspections. We believe
the FDA’s decision represents a major milestone in the ongoing recovery of our
CRM business.
We
remain
focused on our market share recovery and intend to accelerate recovery by
continuing to regain the trust and confidence of the implanting community,
the
referring community and prospective patients; continuing to improve our quality
systems; investing in new technologies and clinical trials; retaining our sales
force and other key personnel; continuing research and development productivity;
and improving physician and patient communication. However, if these efforts
are
not successful, and the CRM market does not recover according to our
expectations, or we are unable to regain market share and net sales on a timely
basis, our business, financial condition and results of operations could be
materially adversely affected.
During
the first quarter of 2007, we continued to incur integration and
restructuring costs as we integrate certain operations of Guidant. There can
be
no assurances that we will realize efficiencies related to the integration
of
the businesses sufficient to offset incremental
transaction,
acquisition-related, integration and restructuring costs over time.
Coronary
Stent Business
Coronary
stent revenue represented approximately 25 percent of our consolidated net
sales
during the first quarter of 2007, as compared to 41 percent during the first
quarter of 2006, attributable primarily to the Guidant acquisition. We
estimate that the worldwide coronary stent market will approximate
$5 billion in 2007 as compared to approximately $6 billion in 2006 and
estimate that drug-eluting stents will represent approximately 80 percent
of the dollar value of market sales in 2007 as compared to 90 percent for
2006.
Our
U.S.
TAXUS® stent system net sales declined to $293 million for the first quarter of
2007 as compared to $419 million for the first quarter of 2006 due primarily
to
a decline in market size. Market size is driven primarily by the number of
percutaneous coronary interventional (PCI) procedures performed; the number
of
devices used per procedure; the drug-eluting stent penetration rate, or mix
between bare metal and drug-eluting stents across procedures; and average
drug-eluting stent selling prices. Uncertainty regarding the perceived risk
of
late stent thrombosis following the use of drug-eluting stents has contributed
to a decline in the U.S. stent market size. Late stent thrombosis is the
formation of a clot, or thrombus, within the stented area one year or more
after
implantation of the stent. For
the first quarter of 2007, the percentage of drug-eluting stents used in U.S.
interventional procedures was approximately 69 percent, as compared to
approximately 88 percent for the first quarter of 2006. In addition to the
decline in U.S. drug-eluting stent market penetration rates, decreases in
overall PCI volume, due likely to market conservatism, contributed to the
reduction in market size. Until the drug-eluting stent market stabilizes, we
expect that there will be continued pressure on our U.S. drug-eluting stent
sales and our level of future drug-eluting stent sales may be below those
experienced in previous periods. We believe that PCIs, device utilization per
procedure and drug-eluting stent penetration rates may increase in the future
and result in a market recovery; however, there can be no assurance that this
will happen or that the market will recover to previous levels.
In
the
fourth quarter of 2006, the FDA held a special advisory panel meeting to discuss
the safety of drug-eluting stents. Members of the panel concluded that
drug-eluting stents remain safe and effective when used as indicated, and that
the benefits outweigh the risks. The FDA is considering extending the clinical
trial data requirements for pre-market approval applications and
post-market surveillance studies, which could affect new product launch
schedules and increase the cost of compliance.
During
the first quarter of 2007, our international TAXUS stent system net sales
decreased by 18 percent to $175 million for the first quarter of 2007 as
compared to $214 million for the same period in 2006. The decline in TAXUS
stent
system sales in these markets was due primarily to market share declines
associated with several competitors having launched new drug-eluting stent
products in these markets. We expect competitive launches in these geographies
to continue to put pressure on our market share and average selling prices
in
2007. Drug-eluting stent penetration rates remained relatively
consistent in the first quarter of 2007 as compared to the same period in the
prior year in these markets and we expect that they will remain relatively
consistent in these markets during the remainder of 2007. In May
2007, following receipt of regulatory and reimbursement approval, we launched
our TAXUS Express2 stent system
in
Japan. Our goal is to achieve a market leadership position in Japan within
several quarters where we estimate the 2007 market size for drug-eluting
stents is approximately $500 million.
The
worldwide coronary stent market has historically been dynamic and highly
competitive with significant market share volatility. In addition, in the
ordinary course of our business, we conduct and participate in numerous clinical
trials with a variety of study designs, patient populations and trial end
points. Unfavorable or inconsistent clinical data from existing or future
clinical trials conducted by us, by our competitors or by third parties, or
the
market’s perception of this clinical data may adversely impact our position in
and share of the drug-eluting stent market and may contribute to increased
volatility in the market.
However,
we believe that we can maintain a leadership position within the drug-eluting
stent markets in which we compete for a variety of reasons,
including:
·
|
the
results of our TAXUS clinical
trials;
|
·
|
the
performance benefits of our current
technology;
|
·
|
the
strength of our pipeline of drug-eluting stent products and the planned
launch sequence of these products;
|
·
|
our
overall worldwide market leadership in interventional medicine and
our
sizeable interventional cardiology sales
force;
|
·
|
our
significant investments in our sales, clinical, marketing and
manufacturing capabilities; and
|
·
|
our
second drug-eluting stent platform obtained as a result of the Guidant
acquisition.
|
However,
a material decline in our drug-eluting stent revenue would have a significant
adverse impact on our future operating results. The most significant variables
that may impact the size of the drug-eluting coronary stent market and our
position within this market include:
·
|
continued
concerns regarding the risk of late stent
thrombosis;
|
·
|
the
entry of additional competitors in markets in which we
participate;
|
·
|
continued
physician and patient confidence in our technology and attitudes
toward
drug-eluting stents;
|
·
|
our
ability to resolve the issues identified in our legacy Boston Scientific
corporate warning letter to the satisfaction of the
FDA;
|
·
|
the
overall number of PCI procedures performed, as well as the prolonged
use
of medical therapy, in lieu of PCIs, to treat the symptoms of coronary
disease;
|
·
|
declines
in the average selling prices of drug-eluting stent
systems;
|
·
|
variations
in clinical results or product performance of our or our competitors’
products;
|
·
|
delayed
or limited regulatory approvals;
|
·
|
unfavorable
reimbursement policies;
|
·
|
intellectual
property litigation;
|
·
|
the
average number of stents used per
procedure;
|
·
|
our
ability to maintain or expand indications for
use;
|
·
|
our
ability to launch next-generation products and technology features,
including our TAXUS LibertéTM stent
system
in the U.S. market;
|
·
|
changes
in FDA clinical trial data requirements and post-market surveillance
studies and the associated impact on new product launch schedules
and the
cost of compliance;
|
·
|
drug-eluting
stent penetration rates; and
|
·
|
economic
and regulatory conditions.
|
The
TAXUS
drug-eluting stent system is currently one of only two drug-eluting systems
available for sale in the U.S. market. Our share of the drug-eluting stent
market, as well as unit prices, may be adversely impacted as additional
competitors enter this market, which could occur as early as the second half
of
2007.
Prior
to
our acquisition of Guidant, Abbott Laboratories acquired Guidant’s vascular
intervention and endovascular solutions businesses and agreed to share the
drug-eluting technology it acquired from Guidant with us, including the XIENCE™
V everolimus-eluting coronary stent system. In October of 2006, we received
CE
mark approval to begin marketing the PROMUS™ stent system, which is a
private-labeled XIENCE V drug-eluting coronary stent system supplied to us
by
Abbott. During the fourth quarter of 2006, we initiated a limited launch of
the
PROMUS stent system in certain European countries. We expect to continue to
broaden our launch in Europe and will begin to launch our PROMUS stent system
in
key Inter-Continental countries in the second quarter of 2007 and in the U.S.
in
2008, subject to regulatory approvals. Under the terms of our supply arrangement
with Abbott, the profit margin of a PROMUS stent system will be significantly
lower than that of our TAXUS drug-eluting stent system. Therefore, the mix
of
PROMUS stent system revenue relative to our total drug-eluting stent
revenue could vary over time and could have a negative impact on our overall
profitability as a percentage of revenue. In addition, we will incur incremental
costs and expend incremental resources in order to develop and commercialize
products utilizing the Guidant drug-eluting stent system technology and to
support the launch of our internally-manufactured everolimus-eluting stent
system in the future, which we expect will have profit margins more comparable
to our TAXUS stent system.
Regulatory
Compliance
In
January 2006, legacy Boston Scientific received a corporate warning letter
from
the FDA notifying us of serious regulatory problems at three facilities.
During 2005, in order to strengthen our corporate-wide quality controls, we
launched Project Horizon, which has resulted in the reallocation of significant
internal engineering and management resources to quality initiatives, as
well as incremental spending. It also has resulted in adjustments to the launch
schedules of certain products and the decision to discontinue certain other
product lines over time.
We
believe we have identified solutions to the quality issues cited by the FDA
and
we continue to make progress in transitioning our organization to implement
those solutions. We communicate frequently and meet regularly with the FDA
to
apprise them of our progress. The FDA has communicated the need for us to
complete substantially all remediation efforts before they will reinspect our
facilities. We have engaged a third party to audit our enhanced quality systems
in order to assess our corporate-wide compliance prior to reinspection by the
FDA. We expect to initiate third-party audits in the second quarter of
2007. Our goal is to complete these audits and begin providing
results to the FDA in the third quarter of 2007.
There
can
be no assurances regarding the length of time or cost it will take us to resolve
these issues to the satisfaction of the FDA. Our inability to resolve these
issues in a timely manner may further delay product launch schedules, including
the U.S. launch of our TAXUS Liberté stent, which may weaken our competitive
position in the markets in which we participate. If our remedial actions are
not
satisfactory to the FDA, we may have to devote additional financial and human
resources to our efforts, and the FDA may take further regulatory actions
against us, including, but not limited to, seizing our product inventory,
obtaining a court injunction against further marketing of our products, issuing
a consent decree or assessing civil monetary penalties.
Debt
Covenant Compliance and Operating Spend
At
March
31, 2007, our net debt was approximately $7.6 billion. During 2007, we may
decide to repay a portion of our debt prior to the first maturity in April
2008
and intend to use a significant portion of our operating cash flow to reduce
our
outstanding debt obligations over the next several years. Our
revolving credit facility and term loan agreement requires that we maintain
certain financial covenants. As of March 31, 2007, we were in compliance with
these covenants. Any breach of these covenants would require that we obtain
waivers from our lenders and there can be no assurance that our lenders would
grant such waivers. Our inability to obtain any necessary waivers, or to obtain
them on reasonable terms, could have a material adverse impact on our
operations. See Financing Activities in our Liquidity and Capital
Resources section for more information on our compliance with these
requirements.
We
have
maintained our operating spending levels given our expectation that the CRM
market and drug-eluting stent market may recover over time. We
believe our existing infrastructure is necessary to support future growth and
to
sustain our market leadership position in drug-eluting stent
systems. We continue to examine our cost structure aggressively
and have begun to implement various programs throughout the organization to
enhance operating efficiencies. We will continue to examine all of
our operations in order to identify sustainable cost improvement measures that
will better align operating expenses with expected revenue levels and
reallocate resources to better support growth initiatives. In addition, we
have
the flexibility to sell certain non-strategic assets and implement other
strategic initiatives, which may increase cash available for debt
repayment.
Proposed
Endosurgery Initial Public Offering (IPO)
In
March
2007, we announced that our Board of Directors has authorized management to
explore an IPO of a minority interest in our Endosurgery group. An IPO would
involve selling a minority interest of the Endosurgery group and establishing
a
separately traded public company. The new company would remain a majority-owned
subsidiary of Boston Scientific and would continue to be consolidated with
Boston Scientific for financial reporting purposes. Our goal is to complete
exploration of the proposed Endosurgery IPO over the next six to 12
months.
There
is
no guarantee that the proposed Endosurgery IPO will be finalized. Completion
of
the proposed Endosurgery IPO is subject to a number of factors and conditions,
including final approval by our Board of Directors and the filing and
effectiveness of registration statements with the SEC. In addition, the
complexity of the transaction will require a substantial amount of management
and operational resources, as well as the use of several cross-functional
project teams. Our business and results of operations may be adversely affected
during the transition period as the attention of management and Endosurgery
personnel is focused on the proposed Endosurgery IPO and away from core business
operations.
Quarterly
Results
Net
Sales
The
following table provides our net sales by region and the relative change on
an
as reported and constant currency basis:
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
Basis
|
|
|
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
1,271
|
|
|
$ |
991
|
|
|
|
28 |
% |
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
463
|
|
|
|
314
|
|
|
|
47 |
% |
|
|
35 |
% |
|
Japan
|
|
|
159
|
|
|
|
134
|
|
|
|
19 |
% |
|
|
21 |
% |
|
Inter-Continental
|
|
|
193
|
|
|
|
181
|
|
|
|
7 |
% |
|
|
5 |
% |
|
International
|
|
|
815
|
|
|
|
629
|
|
|
|
30 |
% |
|
|
23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,086
|
|
|
$ |
1,620
|
|
|
|
29 |
% |
|
|
26 |
% |
The
following table provides our worldwide net sales by division and the relative
change on an as reported and constant currency basis:
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
Three
Months Ended
March
31,
|
|
|
As
Reported
Currency
|
|
|
Constant
Currency
|
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
Basis
|
|
|
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interventional
Cardiology
|
|
$ |
804
|
|
|
$ |
949
|
|
|
|
(15 |
%) |
|
|
(17 |
%) |
|
Peripheral
Interventions/ Vascular Surgery
|
|
|
154
|
|
|
|
184
|
|
|
|
(16 |
%) |
|
|
(18 |
%) |
|
Electrophysiology
|
|
|
36
|
|
|
|
34
|
|
|
|
6 |
% |
|
|
5 |
% |
|
Neurovascular
|
|
|
90
|
|
|
|
80
|
|
|
|
14 |
% |
|
|
11 |
% |
|
Cardiac
Surgery
|
|
|
50
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
Cardiac
Rhythm Management
|
|
|
539
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
Cardiovascular
|
|
|
1,673
|
|
|
|
1,247
|
|
|
|
34 |
% |
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oncology
|
|
|
56
|
|
|
|
54
|
|
|
|
4 |
% |
|
|
2 |
% |
|
Endoscopy
|
|
|
200
|
|
|
|
180
|
|
|
|
11 |
% |
|
|
9 |
% |
|
Urology
|
|
|
95
|
|
|
|
90
|
|
|
|
6 |
% |
|
|
5 |
% |
|
Endosurgery
|
|
|
351
|
|
|
|
324
|
|
|
|
8 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuromodulation
|
|
|
62
|
|
|
|
49
|
|
|
|
28 |
% |
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,086
|
|
|
$ |
1,620
|
|
|
|
29 |
% |
|
|
26 |
% |
We
manage
our international operating regions and divisions on a constant currency basis,
while market risk from currency exchange rate changes is managed at the
corporate level. To calculate regional and divisional revenue growth rates
that
exclude the impact of currency exchange, we convert actual current-period net
sales from local currency to U.S. dollars using constant currency exchange
rates. Certain amounts in the tables above may not sum or recalculate due to
rounding of individual components.
U.S.
Net Sales
During
the first quarter of 2007, our U.S. net sales increased by $280 million, or
28
percent, as compared to the first quarter of 2006. The increase is related
primarily to the inclusion of $395 million of U.S. net sales from our CRM and
Cardiac Surgery divisions, which included ICD sales of $273 million. Offsetting
this increase were declines in our U.S. net sales of TAXUS coronary stent
systems to $293 million for the first quarter of 2007 as compared to $419
million for the first quarter of 2006. The decline in TAXUS sales was due
primarily to a decrease in the U.S. drug-eluting stent market size in the first
quarter of 2007 relative to the same period in the prior year. See the
Outlook section for a more detailed discussion of the drug-eluting
stent market and our position within that market.
International
Net Sales
During
the first quarter of 2007, our international net sales increased by
$186 million, or 30 percent, as compared to the first quarter of 2006.
Excluding the favorable impact of $38 million of foreign currency fluctuations,
our international net sales increased 23 percent. The increase related primarily
to the inclusion of $193 million of international net sales from our CRM and
Cardiac Surgery divisions. TAXUS stent system sales in our Europe and
Inter-Continental markets were $175 million for the first quarter of 2007 as
compared to $214 million for the same period in the prior year. The decline
in
TAXUS stent system sales in these markets was due principally to market share
declines associated with several competitors having launched new drug-eluting
stent products in these markets.
For
the
first quarter of 2007, our legacy Boston Scientific net sales in Japan,
excluding the impact of currency fluctuations, were relatively consistent with
the prior year. In the first quarter of 2007, Japan net sales included $28
million from our CRM and Cardiac Surgery products. We expect our net
sales in Japan will increase significantly throughout the remainder of 2007
following the May 2007 launch of our TAXUS Express2 coronary
stent
system in Japan. See the Outlook section for a more detailed
discussion of the international drug-eluting stent market and our position
within these markets.
Gross
Profit
The
following table provides a summary of our gross profit:
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
(in
millions)
|
|
|
$
|
|
|
%
of Net
Sales
|
|
|
|
$
|
|
|
%
of Net
Sales
|
|
|
Gross
profit
|
|
|
1,518
|
|
|
|
72.8
|
|
|
|
1,246
|
|
|
|
76.9
|
|
During
the first quarter of 2007, our gross profit, as a percentage of net sales,
decreased by 4.1 percentage points as compared to the first quarter of 2006.
Our
gross profit for the first quarter of 2007 decreased by approximately 2.1
percentage points as compared to the same period in the prior year due to period
expenses, including costs associated with Project Horizon and certain inventory
charges. Shifts in our product sales mix toward relatively lower margin
products, including CRM products, and lower sales of TAXUS stent systems in
the
U.S., decreased our gross profit as a percentage of net sales by 1.6 percentage
points. Unfavorable changes in currency exchange rates contributed to a 0.5
percentage point decrease in our gross profit.
Operating
Expenses
The
following table provides a summary of our operating expenses:
|
|
Three
Months Ended
March
31,
|
|
|
|
2007
|
|
|
2006
|
|
(in
millions)
|
|
|
$
|
|
|
%
of Net
Sales
|
|
|
|
$
|
|
|
%
of Net
Sales
|
|
Selling,
general and administrative expenses
|
|
|
735
|
|
|
|
35.2
|
|
|
|
470
|
|
|
|
29.0
|
|
Research
and development expenses
|
|
|
289
|
|
|
|
13.9
|
|
|
|
186
|
|
|
|
11.5
|
|
Royalty
expense
|
|
|
52
|
|
|
|
2.5
|
|
|
|
55
|
|
|
|
3.4
|
|
Amortization
expense
|
|
|
155
|
|
|
|
7.4
|
|
|
|
38
|
|
|
|
2.3
|
|
Selling,
General and Administrative (SG&A) Expenses
During
the first quarter of 2007, our SG&A expenses increased by $265 million,
or 56 percent, as compared to the first quarter of 2006. As a percentage of
our
net sales, SG&A expenses increased to 35.2 percent for the first
quarter of 2007 from 29.0 percent for the same period in the prior year. The
increase in our SG&A expenses related primarily to $248 million of
expenditures related to our CRM and Cardiac Surgery divisions. In the first
quarter of 2007, we maintained spending levels for our legacy Boston Scientific
business in order to support our market leadership position in drug-eluting
stents and believe this infrastructure will be necessary to support our future
growth. We continue to examine our cost structure aggressively and have begun
to
implement various programs throughout the organization to enhance operating
efficiencies.
Research
and Development (R&D) Expenses
Our
investment in R&D reflects spending on regulatory compliance and clinical
research as well as new product development programs. For the first quarter
of
2007, our R&D expenses increased by $103 million, or 55 percent,
as compared to the first quarter of 2006. As a percentage of our net sales,
R&D expenses increased to 13.9 percent for the first quarter of 2007
from 11.5 percent for the same period in the prior year. The increase related
primarily to the inclusion of $107 million in expenditures associated
with our CRM and Cardiac Surgery divisions. We have continued to invest in
our paclitaxel drug-eluting stent program, along with our internally developed
and manufactured everolimus-eluting stent program, in order to sustain our
worldwide drug-eluting stent market leadership position.
Amortization
Expense
For
the
first quarter of 2007, our amortization expense increased by $117 million,
or 308 percent, as compared to the first quarter of 2006. As a percentage of
our
net sales, amortization expense
increased
to 7.4 percent for the first quarter of 2007 from 2.3 percent for the same
period in the prior year. The increase in our amortization expense related
primarily to approximately $120 million associated with the amortization of
intangible assets obtained as part of the Guidant acquisition.
Interest
Expense
For
the
first quarter of 2007, our interest expense increased to $141 million as
compared to $37 million for the first quarter of 2006. The increase in our
interest expense related primarily to an increase in our average debt levels
used to finance the Guidant acquisition, as well as an increase in our
weighted-average borrowing cost. For the first quarter of 2007, our average
debt
levels increased to $8.9 billion as compared to approximately $2.5 billion
for
the first quarter of 2006. Our weighted-average borrowing cost for the first
quarter of 2007 increased to 6.1 percent from 5.3 percent for the same period
in
the prior year.
Other,
net
For
the
first quarter of 2007, our other, net reflected income of $18 million as
compared to expense of $29 million for the first quarter of 2006. Our other,
net
included interest income of $22 million for the first quarter of 2007 as
compared to $9 million for the same period in the prior year. The increase
in
interest income is due primarily to increases in our cash and cash equivalents
balances and increases in average market interest rates. In addition, for the
first quarter of 2006, our other, net included $38 million of charges recorded
associated primarily with investment write-downs due to the termination of
a
gene therapy trial conducted by one of our portfolio companies.
Tax
Rate
The
following table provides a summary of our reported tax rate:
|
|
|
|
|
|
|
|
Three
Months Ended
March
31,
|
|
|
Percentage
Point
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(Decrease)
|
Reported
tax rate
|
|
|
24.5% |
|
|
|
23.0% |
|
|
|
1.5
|
|
Impact
of certain charges*
|
|
|
(3.6%) |
|
|
|
0.0% |
|
|
|
(3.6) |
|
*These
charges are taxed at different rates than our effective tax
rate.
The
increase in our reported tax rate for the first quarter of 2007 as compared
to
the same period in the prior year related primarily to the impact of certain
charges that are taxed at different rates than our effective tax rate. In 2007,
these charges included changes to the reserves for uncertain tax positions
relating to items originating in prior periods, purchased research and
development and charges related to the Guidant acquisition. In addition, our
effective tax rate for the first quarter of 2007 decreased by approximately
two
percentage points as compared to the same period in the prior year due primarily
to our decision at year-end to indefinitely reinvest earnings in foreign
operations in order to repay debt obligations associated with the Guidant
acquisition.
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes. As a result of the
implementation of Interpretation No. 48, we recognized approximately $128
million increase in our liability for unrecognized tax
benefits. Approximately $28 million of this increase was reflected as
a reduction to the January 1, 2007 balance of retained
earnings. Substantially all of the remaining
increase
related to pre-acquisition uncertain tax liabilities related to Guidant and
was
recorded as an increase to goodwill in accordance with purchase accounting
pursuant to Emerging Issues Task Force Issue No. 93-7, Uncertainties
Related to Income Taxes in a Purchase Business
Combination. At the adoption date of January 1, 2007, we
had $1.155 billion of gross unrecognized tax benefits, $360 million of which,
if
recognized, would affect our effective tax rate. At March 31, 2007,
we had $1.180 billion of gross unrecognized tax benefits, $385 million of which,
if recognized, would affect our effective tax rate.
We
are
subject to U.S. federal income tax as well as income tax of multiple state
and
foreign jurisdictions. We have concluded all U.S. federal income tax
matters through 1997. Substantially all material state, local, and
foreign income tax matters have been concluded for all years through 2001,
except for a Japanese appeals court case with respect to the 1995 to
1998 tax periods.
In
the
next twelve months, we expect to resolve multiple issues with the
IRS. We also expect to receive the appellate court decision on
the Japan matter during 2007. As a result of settlement of these
matters we anticipate that our reserve for uncertain tax positions could change
by up to $208 million in the next twelve months.
Our
historical practice was and continues to be to recognize interest and penalties
related to income tax matters in income tax expense. We had $221
million accrued for interest and penalties at adoption of Interpretation
No. 48 and $241 million at March 31, 2007.
We
currently estimate that our 2007 effective tax rate, excluding certain charges,
will be approximately 21 percent. However, acquisitions or dispositions in
2007 and geographic changes in the manufacture of our products may positively
or
negatively impact our effective tax rate.
Purchased
Research and Development
Our
research and development projects acquired in connection with our prior period
business combinations are generally progressing in line with the estimates
set
forth in our 2006 Annual Report on Form 10-K. We expect to continue to pursue
these research and development efforts and believe we have a reasonable chance
of completing the projects.
Liquidity
and Capital Resources
The
following tables provide a summary of key performance indicators that we use
to
assess our liquidity and operating performance:
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
Cash
(used for) provided by operating activities
|
|
$ |
(59 |
) |
|
$ |
564
|
|
Cash
used for investing activities
|
|
|
(300 |
) |
|
|
(847 |
) |
Cash
provided by financing activities
|
|
|
31
|
|
|
|
677
|
|
EBITDA1
|
|
|
536
|
|
|
|
568
|
|
|
|
March
31,
|
|
|
December
31,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
Short-term
debt
|
|
$ |
7
|
|
|
$ |
7
|
|
Long-term
debt
|
|
|
8,898
|
|
|
|
8,895
|
|
Gross
debt
|
|
|
8,905
|
|
|
|
8,902
|
|
Less:
cash and cash equivalents
|
|
|
1,340
|
|
|
|
1,668
|
|
Net
debt
|
|
$ |
7,565
|
|
|
$ |
7,234
|
|
Management
uses EBITDA to assess operating performance and believes that it may assist
users of our financial statements in analyzing the underlying trends in our
business over time. In addition, management considers EBITDA as a component
of
our debt covenants. Users of our financial statements should consider this
non-GAAP financial information in addition to, not as a substitute for, or
as
superior to, financial information prepared in accordance with GAAP. Our EBITDA
included pre-tax charges of $25 million for the first quarter of 2007 and $38
million for the first quarter of 2006.
Operating
Activities
The
change in operating cash flow for the first quarter of 2007 as compared to
the
first quarter of 2006 is attributable primarily to: $400 million in tax payments
associated principally with the gain on Guidant’s sale of its vascular
intervention and endovascular solutions businesses to Abbott; a $80 million
increase in our incentive program that is paid annually in the first quarter,
due primarily to the inclusion of legacy Guidant employees; and a $75
million increase in interest payments related primarily to the increase in
our
average debt levels used to finance the Guidant acquisition. In addition,
in the first quarter of 2006, our cash from operating activities included a
tax
refund of approximately $100 million. We expect to generate positive
operating cash flow during the remainder of 2007. In addition, we expect our
2007 net sales will exceed 2006 levels due primarily to the inclusion of a
full
year of sales from our CRM and Cardiac Surgery businesses, and will potentially
range from $8.3 billion to $8.5 billion.
Investing
Activities
1The
following represents a
reconciliation between EBITDA and net income:
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
EBITDA
|
|
$ |
536
|
|
|
$ |
568
|
|
Interest
income
|
|
|
22
|
|
|
|
9
|
|
Interest
expense
|
|
|
(141 |
) |
|
|
(37 |
) |
Income
taxes
|
|
|
(39 |
) |
|
|
(99 |
) |
Stock-based
compensation expense
|
|
|
(34 |
) |
|
|
(32 |
) |
Depreciation
and amortization
|
|
|
(224 |
) |
|
|
(77 |
) |
Net
income
|
|
$ |
120
|
|
|
$ |
332
|
|
We
made
capital expenditures of $96 million in the first quarter of 2007 as
compared to $49 million during the first quarter of 2006. The increase was
primarily a result of capital expenditures associated with our CRM division
and
spending to enhance the manufacturing capabilities of our Neuromodulation
division. We expect to incur capital expenditures of approximately $350 million
for the remainder of 2007, including capital expenditures to further upgrade
our
quality systems, to enhance further our manufacturing capabilities in order
to
support our second drug-eluting stent platform, and to support continuous growth
in our business units, including our Neuromodulation division.
Certain
of our business combinations involve the payment of contingent consideration.
Our investing activities during the first quarter of 2007 included approximately
$200 million of payments to the former shareholders of Advanced Bionics
Corporation. See Note B - Business Combinations to our unaudited
condensed consolidated financial statements included in this Quarterly Report
for the estimated maximum potential amount of future contingent consideration
we
could be required to pay associated with our business combinations.
Financing
Activities
Our
cash
flows from financing activities reflect issuances and repayments of debt,
payments for share repurchases and proceeds from stock issuances related to
our
equity incentive programs.
We
had
outstanding borrowings of $8.905 billion at March 31, 2007 at a weighted average
interest rate of 6.00 percent, as compared to outstanding borrowings of
$8.902 billion at December 31, 2006 at a weighted average interest
rate of 6.03 percent. Our borrowings at March 31, 2007 consist primarily of
unsecured subsidiary indebtedness including our senior $5.0 billion term
loan and our subordinated $900 million loan from Abbott, and $3.05 billion
in
unsecured, senior notes. There were no amounts outstanding under our $2.35
billion of available credit lines at March 31, 2007.
Our
revolving credit facility and term loan agreement requires that we maintain
a
ratio of debt to pro forma EBITDA, as defined by the agreement, of less than
or
equal to 4.5 to 1.0 through December 31, 2007 and 3.5 to 1.0 thereafter. The
agreement also requires that we maintain a ratio of pro forma EBITDA, as defined
by the agreement, to interest expense of greater than or equal to 3.0 to 1.0.
As
of March 31, 2007, we were in compliance with both of these debt covenants.
Exiting the quarter, our ratio of debt to pro forma EBITDA was 3.9 to 1.0 and
the ratio of pro forma EBITDA to interest expense was 4.3 to
1.0.
Our
credit ratings are BBB- from Fitch Ratings; Baa3 from Moody’s Investor
Service; and BBB from Standard & Poor’s Rating Services. These credit
ratings are investment grade. The ratings outlook by the three rating agencies
is currently negative. Credit rating changes do not trigger an event of
default as defined by our borrowing arrangements.
Legal
Matters
The
medical device market in which we primarily participate is largely technology
driven. Physician customers, particularly in interventional cardiology, have
historically moved quickly to new products and new technologies. As a result,
intellectual property rights, particularly patents and trade secrets, play
a
significant role in product development and differentiation. However,
intellectual property litigation to defend or create market advantage is
inherently complex and unpredictable. Furthermore, appellate courts frequently
overturn lower court patent decisions.
In
addition, competing parties frequently file multiple suits to leverage patent
portfolios across product lines, technologies and geographies and to balance
risk and exposure between the
parties.
In some cases, several competitors are parties in the same proceeding, or in
a
series of related proceedings, or litigate multiple features of a single class
of devices. These forces frequently drive settlement not only of individual
cases, but also of a series of pending and potentially related and unrelated
cases. In addition, although monetary and injunctive relief is typically sought,
remedies and restitution are generally not determined until the conclusion
of
the proceedings and are frequently modified on appeal. Accordingly, the outcomes
of individual cases are difficult to time, predict or quantify and are often
dependent upon the outcomes of other cases in other geographies.
Several
third parties have asserted that our current and former stent systems infringe
patents owned or licensed by them. We have similarly asserted that stent systems
or other products sold by these companies infringe patents owned or licensed
by
us. Adverse outcomes in one or more of these proceedings could limit our ability
to sell certain stent products in certain jurisdictions, or reduce our operating
margin on the sale of these products.
We
are
substantially self-insured with respect to general, product liability and
securities litigation claims. In the normal course of business, product
liability and securities litigation claims are asserted against us. Product
liability and securities litigation claims against us may be asserted in the
future related to events not known to management at the present time. The
absence of significant third-party insurance coverage increases our potential
exposure to unanticipated claims or adverse decisions. Product liability claims,
product recalls, securities litigation and other litigation in the future,
regardless of their outcome, could have a material adverse effect on our
financial position, results of operations or
liquidity.
We
accrue
anticipated costs of settlement and damages and, under certain conditions,
costs
of defense, based on historical experience or to the extent specific losses
are
probable and estimable. We record losses for claims in excess of the limits
of
purchased insurance in earnings at the time and to the extent they are probable
and estimable. If the estimate of a probable loss is a range and no amount
within the range is more likely, we accrue the minimum amount of the range.
In
connection with our acquisition of Guidant, the number of legal claims against
us, including product liability, private securities and shareholder derivative
claims, significantly increased. Our accrual for legal matters that are probable
and estimable was $732 million at March 31, 2007 and $485 million at
December 31, 2006, and includes costs of settlement, damages
and defense. The amounts accrued relate primarily to assumed Guidant
litigation and claims recorded as part of the purchase price. In connection
with
the acquisition of Guidant, we continue to assess certain assumed litigation
and
claims to determine the amounts that management believes will be paid as a
result of such claims and litigation and, therefore, additional losses may
be
accrued in the future, which could adversely impact our operating results and
our ability to comply with our debt covenants.
Note
H - Commitments and Contingencies to our unaudited condensed consolidated
financial statements contained in this Quarterly Report identifies all material
developments with regard to any matters of litigation disclosed in our 2006
Annual Report on Form 10-K or instituted since December 31,
2006.
Cautionary
Statement for Purposes of the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995
Certain
statements that we may make from time to time, including statements contained
in
this report and information incorporated by reference into this report,
constitute “forward-looking
statements.”
Forward-looking statements may be identified by words like “anticipate,”
“expect,” “project,” “believe,” “plan,” “estimate,” “intend” and similar words
used in connection with, among other things, discussions of our financial
performance, growth strategy, regulatory approvals, product development or
new
product launches, market position, sales efforts, intellectual property matters
or acquisitions and divestitures. These forward-looking statements are based
on
our beliefs, assumptions and estimates using information available to us at
the
time and are not intended to be guarantees of future events or performance.
If
our underlying assumptions turn out to be incorrect, or if certain risks or
uncertainties materialize, actual results could vary materially from the
expectations and projections expressed or implied by our forward-looking
statements. As a result, investors are cautioned not to place undue reliance
on
any of our forward-looking statements.
We
do not
intend to update the forward-looking statements below even if new information
becomes available or other events occur in the future. We have identified these
forward-looking statements below and in order to take advantage of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Certain factors that could cause actual results to differ materially from those
expressed in forward-looking statements are contained below.
CRM
Business
·
|
Our
estimate for the worldwide CRM market, the recovery of the CRM market
to
historical growth rates and our ability to regain CRM market share
and
increase CRM net sales;
|
·
|
The
overall performance of and referring physician, implanting physician
and
patient confidence in our and other CRM products and technologies,
including our LATITUDE® Patient Management System and next-generation
pulse generator platform;
|
·
|
Our
ability to minimize or eliminate future field actions relating to
our CRM
technology;
|
·
|
The
results of CRM clinical trials undertaken by us, our competitors
or other
third parties;
|
·
|
Our
ability to launch various products utilizing our next-generation
CRM pulse
generator platform, in the U.S. over the next 36 months and to expand
our CRM market position through reinvestment in our CRM products
and
technologies;
|
·
|
Our
ability to retain our CRM sales force and other key
personnel;
|
·
|
Competitive
offerings in the CRM market and the timing of receipt of regulatory
approvals to market existing and anticipated CRM products and
technologies; and
|
·
|
Our
ability to avoid disruption in the supply of certain components or
materials or to quickly secure additional or replacement components
or
materials on a timely basis.
|
Coronary
Stent Business
·
|
Volatility
in the coronary stent market, competitive offerings and the timing
of
|
|
receipt
of regulatory approvals to market existing and anticipated drug-eluting
stent technology and other stent
platforms;
|
·
|
Our
ability to launch our TAXUS® Express2™
coronary
stent system in Japan successfully, and to launch our next-generation
drug-eluting stent system, the TAXUS® Liberté coronary stent system, in
the U.S., subject to regulatory approval, and to maintain or expand
our
worldwide market positions through reinvestment in our drug-eluting
stent
program;
|
·
|
Our
estimate for the worldwide drug-eluting stent market, the impact
of
concerns relating to late stent thrombosis on the size of the coronary
stent market, distribution of share within the coronary stent market
in
the U.S. and around the world, the average number of stents used
per
procedure and average selling
prices;
|
·
|
The
overall performance of and continued physician confidence in our
and other
drug-eluting stents, our ability to adequately address concerns regarding
the risk of late stent thrombosis, and the results of drug-eluting
stent
clinical trials undertaken by us, our competitors or other third
parties;
|
·
|
Our
ability to sustain or increase the penetration rate of drug-eluting
stent
technology in the U.S. and our European and Inter-Continental
markets;
|
·
|
Our
ability to take advantage of our position as one of two early entrants
in
the U.S. drug-eluting stent market, to anticipate competitor products
as
they enter the market and to respond to the challenges presented
as
additional competitors enter the U.S. drug-eluting stent
market;
|
·
|
Our
ability to manage inventory levels, accounts receivable, gross margins
and
operating expenses relating to our drug-eluting stent systems and
other
product franchises and to react effectively to worldwide economic
and
political conditions;
|
·
|
Our
ability to manage the launch of our PROMUS stent system and the supply
of
this stent system in sufficient quantities and mix;
and
|
·
|
Our
ability to manage the mix of our PROMUS stent system revenue relative
to
our total drug-eluting stent revenue and maintain our overall
profitability as a percentage of
revenue.
|
Litigation
and Regulatory Compliance
·
|
Any
conditions imposed in resolving, or any inability to resolve, our
corporate warning letter or other FDA matters, as well as risks generally
associated with our regulatory compliance quality systems and complaint
handling;
|
·
|
The
effect of our litigation, risk management practices, including
self-insurance, and compliance activities on our loss contingency,
legal
provision and cash flow;
|
·
|
The
impact of our stockholder derivative and class action, patent, product
liability, contract and other litigation and other legal
proceedings;
|
·
|
The
ongoing, inherent risk of potential physician communications or field
actions related to medical devices;
|
·
|
Costs
associated with our incremental compliance and quality initiatives,
including Project Horizon; and
|
·
|
The
availability and rate of third-party reimbursement for our products
and
procedures.
|
Innovation
·
|
Our
ability to complete planned clinical trials successfully, to obtain
regulatory approvals and to develop and launch products on a timely
basis
within cost estimates, including the successful completion of in-process
projects from purchased research and
development;
|
·
|
Our
ability to manage research and development and other operating expenses
consistent with our expected revenue
growth;
|
·
|
Our
ability to fund and achieve benefits from our focus on internal research
and development and external alliances as well as our ability to
capitalize on opportunities across our
businesses;
|
·
|
Our
ability to develop products and technologies successfully in addition
to
our drug-eluting stent and CRM
technologies;
|
·
|
Our
ability to develop next-generation products and technologies within
our
drug-eluting stent and CRM
business;
|
·
|
Our
failure to succeed at, or our decision to discontinue, any of our
growth
initiatives;
|
·
|
Our
ability to integrate the acquisitions and other strategic alliances
we
have consummated, including
Guidant;
|
·
|
Our
decision to exercise, or not to exercise, options to purchase certain
companies party to our strategic alliances and our ability to fund
with
cash or common stock these and other acquisitions, or to fund contingent
payments associated with these
alliances;
|
·
|
The
timing, size and nature of strategic initiatives, market opportunities
and
research and development platforms available to us and the ultimate
cost
and success of these initiatives;
and
|
·
|
Our
ability to successfully identify, develop and market new products
or the
ability of others to develop products or technologies that render
our
products or technologies noncompetitive or
obsolete.
|
International
Markets
·
|
Dependency
on international net sales to achieve
growth;
|
·
|
Risks
associated with international operations, including compliance with
local
legal and regulatory requirements as well as reimbursement practices
and
policies; and
|
·
|
The
potential effect of foreign currency fluctuations and interest rate
fluctuations on our net sales, expenses and resulting
margins.
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Liquidity
·
|
Our
ability to generate sufficient cash flow to fund operations and capital
expenditures, as well as our strategic investments over the next
twelve
months and to maintain borrowing flexibility beyond the next twelve
months;
|
·
|
Our
ability to achieve positive operating cash flow for the remainder
of 2007
and 2007 net sales in excess of 2006
levels;
|
·
|
Our
ability to access the public capital markets and to issue debt or
equity
securities on terms reasonably acceptable to
us;
|
·
|
Our
ability to achieve a 21 percent effective tax rate, excluding certain
charges, during 2007 and to recover substantially all of our deferred
tax
assets;
|
·
|
Our
ability to maintain investment-grade credit ratings and to remain
in
compliance with our financial
covenants;
|
·
|
Our
ability to generate sufficient cash flow to effectively manage our
debt
levels and minimize the impact of interest rate fluctuations on our
floating-rate debt; and
|
·
|
Our
ability to identify and implement various programs to enhance operating
effectiveness and to reallocate resources to support our future
growth.
|
Other
·
|
Risks
associated with significant changes made or to be made to our
organizational structure or to the membership of our executive
committee;
|
·
|
Risks
associated with our acquisition of Guidant, including, among other
things,
the indebtedness we have incurred and the integration costs and challenges
we will continue to face; and
|
·
|
Our
ability to maintain management focus on core business activities
while
also concentrating on resolving the corporate warning letter and
implementing strategic initiatives in order to reduce current debt
levels.
|
Several
important factors, in addition to the specific factors discussed in connection
with each forward-looking statement individually 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
3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
develop, manufacture and sell medical devices globally and our earnings and
cash
flow are exposed to market risk from changes in currency exchange rates and
interest rates. We address these risks through a risk management program that
includes the use of derivative financial instruments. We operate the program
pursuant to documented corporate risk management policies. We do not enter
derivative transactions for speculative purposes. Gains and losses on derivative
financial instruments substantially offset losses and gains on underlying hedged
exposures. Furthermore, we manage our exposure to counterparty risk on
derivative instruments by entering into contracts with a diversified group
of
major financial institutions and by monitoring outstanding
positions.
Our
currency risk consists primarily of foreign currency denominated firm
commitments, forecasted foreign currency denominated intercompany and third
party transactions and net investments in certain subsidiaries. We use both
nonderivative (primarily European manufacturing operations) and derivative
instruments to manage our earnings and cash flow exposure to changes in currency
exchange rates. We had currency derivative instruments outstanding in the
contract amount of $4.174 billion at March 31, 2007 and $3.413 billion at
December 31, 2006. We recorded $63 million of other assets and $18 million
of other liabilities to recognize the fair value of these derivative instruments
at March 31, 2007 as compared to $71 million of other assets and
$27 million of other liabilities recorded at December 31, 2006. A
10 percent appreciation in the U.S. dollar’s value relative to the hedged
currencies would increase the derivative instruments’ fair value by $142 million
at March 31, 2007 and $112 million at December 31, 2006. A
10 percent depreciation in the U.S. dollar’s value relative to the hedged
currencies would decrease the derivative instruments’ fair value by $167 million
at March 31, 2007 and $134 million at December 31, 2006. Any increase or
decrease in the fair value of our currency exchange rate sensitive derivative
instruments would be substantially offset by a corresponding decrease or
increase in the fair value of the hedged underlying asset, liability or
forecasted transaction.
Our
interest rate risk relates primarily to U.S. dollar borrowings partially offset
by U.S. dollar cash investments. We use interest rate derivative instruments
to
manage the risk of interest rate changes either by converting floating-rate
borrowings into fixed-rate borrowings or fixed-rate borrowings into
floating-rate borrowings. As of March 31, 2007, $5.9 billion, or 78 percent,
of
our net debt balance of $7.6 billion was at fixed interest rates. There were
no
material changes in our interest rate derivative instruments outstanding at
March 31, 2007 and the associated market risk since December 31,
2006.
ITEM
4. CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our President and Chief Executive Officer
and Executive Vice President - Finance & Administration and Chief Financial
Officer, evaluated the
effectiveness
of our disclosure controls and procedures as of March 31, 2007 pursuant to
Rule 13a-15(b) of the Securities Exchange Act. Disclosure controls and
procedures are designed to ensure that material information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and ensure that such material
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. Based on their evaluation,
our
Chief Executive Officer and Chief Financial Officer concluded that as of March
31, 2007, our disclosure controls and procedures were effective.
Changes
in Internal Controls over Financial Reporting
During
the quarter ended March 31, 2007, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
PART
II
ITEM
1. LEGAL PROCEEDINGS
Note
H - Commitments and Contingencies to our unaudited
condensed consolidated financial statements contained elsewhere in this
Quarterly Report is incorporated herein by reference.
ITEM
1A. RISK FACTORS
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in “Part I, Item 1A. Risk Factors” in
our 2006 Annual Report filed on Form 10-K, which could materially affect
our business, financial condition or future results. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.
ITEM
6. EXHIBITS
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, President and Chief Executive
Officer.
|
32.2
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Executive
Vice
President and Chief Financial
Officer.
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized on May 9, 2007.
|
BOSTON
SCIENTIFIC CORPORATION
|
|
|
|
|
|
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By:
|
/s/ Lawrence
C.
Best |
|
|
|
Name: Lawrence
C. Best
|
|
|
|
Title:
Chief Financial Officer and Executive Vice President - Finance and
Administration
|
|
|
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