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BSX > SEC Filings for BSX > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for BOSTON SCIENTIFIC CORP


7-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction
Boston Scientific Corporation is a worldwide developer, manufacturer and marketer of medical devices that are used in a broad range of interventional medical specialties. Our mission is to transform lives through innovative medical solutions that improve the health of patients around the world. Our products and technologies are used to diagnose or treat a wide range of medical conditions, including heart, digestive, pulmonary, vascular, urological, women's health, and chronic pain conditions. We continue to innovate in these areas and are intent on extending our innovations into new geographies and high-growth adjacency markets.
Effective as of January 1, 2013, we reorganized our business into fully operationalized global business units. We have three new global reportable segments comprised of Cardiovascular, Rhythm Management, and MedSurg. We have restated prior period information for 2012 to conform to current year presentation of our segments.
Financial Summary
Three Months Ended March 31, 2013
Our net sales for the first quarter of 2013 were $1.761 billion, as compared to net sales of $1.866 billion for the first quarter of 2012, a decrease of $105 million, or six percent. Excluding the impact of changes in foreign currency exchange rates, which had a $35 million negative impact on our first quarter 2013 net sales as compared to the same period in the prior year, and the change in net sales from divested businesses of $7 million, our net sales decreased $77 million, or four percent.1 Refer to Business and Market Overview for a discussion of our net sales by global business.
Our reported net loss for the first quarter of 2013 was $354 million, or $0.26 per share, driven primarily by a goodwill impairment charge related to our global Cardiac Rhythm Management (CRM) business unit recorded in conjunction with interim goodwill impairment testing required following the change in composition of our segments and reporting units. Refer to Quarterly Results and Critical Accounting Policies and Estimates for a discussion of our goodwill valuation and this impairment charge. Our reported results for the first quarter of 2013 included a goodwill impairment charge, acquisition- and divestiture-related net credits, restructuring- and litigation-related charges, and amortization expense totaling $578 million (after-tax), or $0.42 per share. Excluding these items, net income for the first quarter of 2013 was $224 million, or $0.16 per share.1 Our reported net income for the first quarter of 2012 was $113 million, or $0.08 per share. Our reported results for the first quarter of 2012 included acquisition-, divestiture-, and restructuring-related charges and amortization expense totaling $107 million, or $0.07 per share. Excluding these items, net income for the first quarter of 2012 was $220 million, or $0.15 per share.1

1 Sales growth rates that exclude the impact of changes in foreign currency exchange rates and net income and net income per share excluding certain items required by GAAP are not prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). Refer to Additional Information for a discussion of management's use of these non-GAAP financial measures.


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The following is a reconciliation of results of operations prepared in accordance with U.S. GAAP to those adjusted results considered by management. Refer to Quarterly Results for a discussion of each reconciling item:

                                                                     Three Months Ended March 31, 2013
                                                                            Tax                                   Impact per
in millions, except per share data                 Pre-Tax                Impact              After-Tax              share
GAAP net loss                                $         (394 )         $         40       $           (354 )     $       (0.26 )
Non-GAAP adjustments:
Goodwill impairment charge                              423                     (1 )                  422                0.31   *
Acquisition-related charges (credits)                   (23 )                    -                    (23 )             (0.02 ) *
Divestiture-related charges (credits)                    (5 )                    2                     (3 )              0.00   *
Restructuring-related charges                            15                     (4 )                   11                0.01   *
Litigation-related charges                              130                    (48 )                   82                0.06   *
Amortization expense                                    103                    (14 )                   89                0.06   *
Adjusted net income                          $          249           $        (25 )     $            224       $        0.16

* Assumes dilution of 12.8 million shares for the three months ended March 31, 2013 for all or a portion of these non-GAAP adjustments.

                                                        Three Months Ended March 31, 2012
                                                              Tax                        Impact per
in millions, except per share data            Pre-Tax       Impact        After-Tax         share
GAAP net income                             $     123     $     (10 )   $       113     $      0.08
Non-GAAP adjustments:
Acquisition-related charges (credits)              12            (1 )            11            0.00
Divestiture-related charges (credits)               1             -               1            0.00
Restructuring-related charges                      17            (4 )            13            0.01
Amortization expense                               97           (15 )            82            0.06
Adjusted net income                         $     250     $     (30 )   $       220     $      0.15

Cash provided by operating activities was $163 million in the first quarter of 2013, as compared to $212 million in the first quarter of 2012. Our cash generated from operations continued to be a significant source of available funds for investing in our growth and buying back shares of our common stock pursuant to our share repurchase programs. During the first quarter of 2013, we used approximately $100 million of cash generated from operations to repurchase approximately 13 million shares of our common stock. As of March 31, 2013, we had total debt of $4.254 billion, cash and cash equivalents of $268 million and working capital of $1.466 billion. Refer to Liquidity and Capital Resources for further discussion.

1 Sales growth rates that exclude the impact of changes in foreign currency exchange rates and net income and net income per share excluding certain items required by GAAP are not prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). Refer to Additional Information for a discussion of management's use of these non-GAAP financial measures.

Quarterly Results and Business Overview
Effective as of January 1, 2013, we reorganized our business into fully operationalized global business units. We have three new global reportable segments comprised of Cardiovascular, Rhythm Management, and MedSurg.


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Net Sales
We manage our global businesses on a constant currency basis, and we manage market risk from currency exchange rate changes at the corporate level. Management excludes the impact of changes in foreign currency exchange rates for purposes of reviewing global revenue growth rates to facilitate an evaluation of current operating performance and comparison to past operating performance. To calculate revenue growth rates that exclude the impact of changes in foreign currency exchange rates, we convert actual net sales from local currency to U.S. dollars using constant foreign currency exchange rates in the current and prior period. The constant currency growth rates in the tables below can be recalculated from our net sales presented in Note L - Segment Reporting to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q.
The following table provides our worldwide net sales by business and the relative change on an as reported and constant currency basis, both excluding and including divested businesses. Net sales that exclude the impact of changes in foreign currency exchange rates are not financial measures prepared in accordance with U.S. GAAP and should not be considered in isolation from, or as a replacement for, the most directly comparable GAAP financial measure. Refer to Additional Information for a further discussion of management's use of this non-GAAP financial measure.

                                                                       Change
                                   Three Months Ended
                                        March 31,             As Reported     Constant
                                                               Currency       Currency
(in millions)                        2013           2012         Basis         Basis
   Interventional Cardiology   $      505         $   603        (16 )   %     (14 )  %
   Peripheral Interventions           191             190          -     %       3    %
Cardiovascular                        696             793        (12 )   %     (10 )  %

   Cardiac Rhythm Management          478             501         (5 )   %      (4 )  %
   Electrophysiology                   35              37         (6 )   %      (5 )  %
Rhythm Management                     513             538         (5 )          (4 )

   Endoscopy                          309             302          3     %       5    %
   Urology/Women's Health             118             120         (2 )   %       -    %
   Neuromodulation                     89              84          6     %       6    %
 MedSurg                              516             506          2             4    %

Subtotal Core Businesses            1,725           1,837         (6 )   %      (4 )  %
Divested Businesses                    36              29        N/A           N/A
Worldwide                      $    1,761         $ 1,866         (6 )   %      (4 )  %

Growth rates are based on actual, non-rounded amounts and may not recalculate precisely.
Cardiovascular
Interventional Cardiology
Our extensive, innovative product offerings have enabled us to maintain a leadership position in the interventional cardiology market. This leadership is due in large part to our coronary stent product offerings. We market our internally-developed and self-manufactured PROMUS® Element™ everolimus-eluting stent platform in all major markets worldwide, as well as our TAXUS® paclitaxel-eluting stent line. In addition to coronary stent systems, our Interventional Cardiology business markets balloon catheters, rotational atherectomy systems, guide wires, guide catheters, embolic protection devices, and diagnostic catheters used in percutaneous transluminal coronary angioplasty (PTCA) procedures, as well as intravascular ultrasound (IVUS) imaging systems. During the fourth quarter of 2012, we received CE Mark approval for the next generation SYNERGY™ Everolimus-Eluting Platinum Chromium Coronary Stent System featuring an ultra-thin abluminal (outer) bioabsorbable polymer coating and commenced a limited commercial launch. The SYNERGY Stent is unique in that its polymer is gone shortly after drug elution is complete at three months. This innovation has the potential to improve post-implant vessel healing and eliminate long-term polymer exposure, a possible cause of late adverse events. We are currently enrolling patients in the EVOLVE II clinical trial, which is designed to further assess the safety and effectiveness of the SYNERGY Stent System and support U.S. Food and Drug


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Administration (FDA) and Japanese regulatory approvals for this technology. In the first quarter of 2013, we received CE Mark approval and launched our Promus PREMIER™ Everolimus-Eluting Platinum Chromium Coronary Stent System in Europe and other select geographies. The Promus PREMIER Stent System is designed to provide physicians improved drug-eluting stent (DES) performance in treating patients with coronary artery disease. We expect to launch the Promus PREMIER Stent System in the U.S. in the fourth quarter of 2013 following FDA approval. Our worldwide net sales of Interventional Cardiology products were $505 million in the first quarter of 2013, or approximately 29 percent of our consolidated net sales in the first quarter of 2013. Our worldwide net sales of Interventional Cardiology products decreased $98 million, or 16 percent, in the first quarter of 2013, as compared to 2012. Excluding the impact of changes in foreign currency exchange rates, which had a $14 million negative impact on our Interventional Cardiology net sales in the first quarter of 2013, as compared to the same period in the prior year, net sales of these products decreased $84 million, or 14 percent. This decrease was primarily related to lower DES market share and average selling price declines as a result of competitive product launches.
Our coronary stent system sales represent a significant portion of our Interventional Cardiology net sales. The following are the components of our worldwide coronary stent system sales:

                           Three Months Ended                          Three Months Ended
(in millions)                March 31, 2013                              March 31, 2012
                    U.S.        International      Total        U.S.        International      Total
Drug-eluting    $   117        $           175    $  292    $   176        $           187    $  363
Bare-metal            5                     13        18          7                     17        24
                $   122        $           188    $  310    $   183        $           204    $  387

Our worldwide net sales of coronary stent systems decreased $77 million, or 20 percent, in the first quarter of 2013, as compared to 2012. Excluding the impact of changes in foreign currency exchange rates, which had an $8 million negative impact on our coronary stent system net sales in the first quarter of 2013, as compared to the same period in the prior year, net sales of these products decreased $69 million, or 18 percent. This decrease was primarily related to lower market share due to competitive launches in 2012, average selling price declines as a result of continued competitive pressures, and declines in procedural volumes in the U.S. DES market. We expect to anniversary the year-over-year comparative impact of the 2012 competitive launches during the second quarter of 2013.
Historically, the worldwide coronary stent market has been dynamic and highly competitive with significant market share volatility. We believe that we will continue to maintain a strong position within the worldwide DES market for a variety of reasons, including:
• the performance benefits of our current and future technology;

• the strength of our pipeline of DES products, which has shown favorable results in clinical trials to date;

• the breadth and depth of our interventional cardiology product portfolio;

• the broad and consistent long-term results of our clinical trials;

• our overall position in the interventional medical device market and our experienced interventional cardiology sales force;

• the strength of our clinical, selling, marketing and manufacturing capabilities; and

• our increased presence and investment in rapidly growing emerging markets, including Brazil, Russia, India and China.

However, a decline in net sales from our DES systems could have a significant adverse impact on our operating results. Significant variables that may impact the size of the DES market and our position within this market include, but are not limited to:
• the impact of competitive pricing pressure on average selling prices of DES systems available in the market;

• the impact and outcomes of on-going and future clinical results involving our or our competitors' products, including those trials sponsored by our competitors or other third parties, or perceived product performance of our or our competitors' products;

• new product launches by our competitors;

• our ability to timely and successfully launch new or next-generation products and technologies, in line with our commercialization strategies;


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• physician and patient confidence in our current and next-generation technology;

• changes in the overall number of percutaneous coronary intervention procedures performed, drug-eluting stent penetration rates and the average number of stents used per procedure;

• delayed or limited regulatory approvals and unfavorable reimbursement policies; and

• the outcome of intellectual property litigation.

In January 2011, we completed the acquisition of Sadra Medical, Inc. Through our acquisition of Sadra, we are developing a fully repositionable and retrievable device for transcatheter aortic valve replacement (TAVR) to treat patients with severe aortic stenosis. The Lotus™ Valve System consists of a stent-mounted tissue valve prosthesis and catheter delivery system for guidance and placement of the valve. The low-profile delivery system and introducer sheath are designed to enable accurate positioning, repositioning and retrieval at any time prior to release of the aortic valve implant. We believe TAVR is one of the fastest growing medical device markets. In April 2013, we completed enrollment in the REPRISE II clinical trial to evaluate the safety and performance of the Lotus™ Valve System. We expect to receive CE Mark approval for the Lotus ™ Valve System and commence our launch in Europe and certain other international markets during the fourth quarter of 2013.
In March 2011, we completed the acquisition of Atritech, Inc. Atritech developed a novel device designed to close the left atrial appendage in patients with atrial fibrillation who are at risk for ischemic stroke. The WATCHMAN® Left Atrial Appendage Closure Technology is the first device proven in a randomized clinical trial to offer an alternative to anticoagulant drugs, and is marketed in CE Mark countries. In the U.S., we completed the PREVAIL trial to evaluate the safety and efficacy of the WATCHMAN® device in patients with nonvalvular atrial fibrillation versus long-term warfarin therapy. We continue to work through our final statistical analysis of the PREVAIL data and expect to submit the final clinical module to the FDA in the second quarter of 2013. We are leveraging expertise from both our Electrophysiology and Interventional Cardiology businesses in the commercialization of the WATCHMAN® device. Peripheral Interventions (PI)
Our PI product offerings include stents, balloon catheters, wires, peripheral embolization devices and other devices used to diagnose and treat peripheral vascular disease. Our worldwide net sales of these products were $191 million in the first quarter of 2013, as compared to $190 million in the first quarter of 2012, an increase of $1 million. Excluding the impact of changes in foreign currency exchange rates, our worldwide PI net sales increased $6 million, or three percent, in the first quarter of 2013, as compared to the first quarter of 2012. The year-over-year increase in worldwide PI net sales was primarily driven by growth in our core PI franchise as the result of new product launches in stents, balloons and chronic total occlusions (CTO) devices, which we expect to continue to drive our future growth.
During the fourth quarter of 2012, we completed the acquisition of Vessix Vascular, Inc., a developer of catheter-based renal denervation systems for the treatment of uncontrolled hypertension. Through the acquisition of Vessix, we added a second generation, highly differentiated technology to our hypertension strategy, and we believe this technology will accelerate our entry into the hypertension market. We expect to launch this technology commercially in Europe and certain other international markets in 2013. Rhythm Management
Cardiac Rhythm Management (CRM)
Our CRM division develops, manufactures and markets a variety of implantable devices including implantable cardioverter defibrillator (ICD) systems and pacemaker systems that monitor the heart and deliver electricity to treat cardiac abnormalities. Worldwide net sales of our CRM products of $478 million in the first quarter of 2013, represented approximately 27 percent of our consolidated net sales for the first quarter of 2013. Our worldwide CRM net sales decreased $23 million, or five percent, in the first quarter of 2013, as compared to the same period in the prior year. Excluding the impact of changes in foreign currency exchange rates, which had a $4 million negative impact on our first quarter 2013 CRM net sales as compared to the same period in the prior year, our CRM net sales decreased $19 million, or four percent.


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The following are the components of our worldwide CRM net sales:

                                     Three Months Ended                                     Three Months Ended
(in millions)                          March 31, 2013                                         March 31, 2012
                          U.S.           International         Total             U.S.           International         Total
ICD systems         $       221        $           129     $       350     $       229        $           139     $       368
Pacemaker systems            62                     66             128              63                     70             133
CRM products        $       283        $           195     $       478     $       292        $           209     $       501

The reduction in our worldwide CRM net sales during the first quarter of 2013 as compared to the first quarter of 2012 was principally the result of declines in our ICD systems sales primarily due to the impact of average selling price pressures driven by governmental, competitive and other pricing pressures. In addition, our sales levels related to replacement procedures were lower than the prior year due to historical product recalls and subsequent reductions in our denovo (first time) ICD implants following these recalls. However, we believe that our U.S. denovo ICD share continued to increase during the first quarter of 2013 as a result of our INCEPTA™ and ENERGEN™ line of defibrillators that lead the industry in device longevity, and our highly-reliable RELIANCE lead platform.
Our pacemaker system sales decreased during the first quarter of 2013 as compared to the first quarter of 2012 primarily due to declines in the overall market. In the first half of 2012, we launched our INGENIO™ family of pacemaker systems in the U.S. and Europe, Middle East, and Africa (EMEA), and in July 2012, we received CE Mark approval for use of our INGENIO™ and ADVANTIO™ pacemakers in patients in need of a magnetic resonance imaging (MRI) scan, which we believe represents a significant advancement to our family of pacemaker devices. In the second quarter of 2012, we received FDA approval for our INVIVE™ cardiac resynchronization therapy pacemakers (CRT-Ps). We believe these recent product launches position us well within the worldwide pacemaker market. During the second quarter of 2012, we completed the acquisition of Cameron Health, Inc. (Cameron). Cameron developed the world's first and only commercially available subcutaneous implantable cardioverter defibrillator, the S-ICD® System, which we believe is a differentiated technology that will provide us the opportunity to both increase our market share in the existing ICD market and expand that market over time. The S-ICD® system has received CE Mark and FDA approval and is available in EMEA and the U.S. on a limited basis. We continued to make progress in our efforts to enhance the S-ICD supply chain following early FDA approval in the third quarter of 2012. Despite these efforts, we have been supply constrained since early March 2013 and we expect to be able to provide only a very limited supply of S-ICD in the second quarter of 2013. We are managing this supply shortage with our customers and we continue to work diligently to expand our production capacity. We expect that these efforts will put us in a position to resume our controlled launch of the S-ICD system in the second half of 2013.
Net sales from our CRM products represent a significant source of our overall net sales. Therefore, increases or decreases in our CRM net sales could have a significant impact on our consolidated results of operations. Variables that may impact the size of the CRM market and/or our share of that market include, but are not limited to:
• the on-going impact of physician alignment to hospitals, government investigations and audits of hospitals, and other market and economic conditions on the overall number of procedures performed and average selling prices;

• our ability to retain and attract key members of our CRM sales force and other key CRM personnel;

• the ability of CRM manufacturers to maintain the trust and confidence of the implanting physician community, the referring physician community and prospective patients in CRM technologies;

• future product field actions or new physician advisories issued by us or our competitors;

• our ability to timely and successfully acquire or develop, launch and supply new or next-generation competitive products and technologies worldwide, in line with our commercialization strategies, including the S-ICD® system;

• new product launches by our competitors;

• variations in clinical results, reliability or product performance of our and our competitors' products; and

• delayed or limited regulatory approvals and unfavorable reimbursement policies.

Electrophysiology
Our Electrophysiology business develops less-invasive medical technologies used in the diagnosis and treatment of rate and rhythm disorders of the heart. Our leading products include the Blazer™ line of ablation catheters, designed to deliver enhanced


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performance, responsiveness and durability. Our Blazer™ line includes our next generation Blazer™ Prime ablation catheter, and our Blazer™ Open-Irrigated Catheter, launched in select European countries. Worldwide net sales of our Electrophysiology products were $35 million in the first quarter of 2013 as compared to $37 million in the first quarter of 2012, a decline of $2 million. Changes in foreign currency exchange rates did not materially affect our Electrophysiology net sales in the first quarter of 2013, as compared to the same period in the prior year.
During the fourth quarter of 2012, we completed the acquisition of Rhythmia Medical, Inc., a developer of next-generation mapping and navigation solutions for use in cardiac catheter ablations and other electrophysiology procedures, including atrial fibrillation and atrial flutter. We expect to receive CE Mark approval for the Rhythmia technology during the second quarter of 2013 and FDA approval during the second half of 2013. We believe that this acquisition, as . . .

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