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BSX > SEC Filings for BSX > Form 10-K on 26-Feb-2014All Recent SEC Filings

Show all filings for BOSTON SCIENTIFIC CORP

Form 10-K for BOSTON SCIENTIFIC CORP


26-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8 of this Annual Report.
Executive Summary
Financial Highlights and Trends

In 2013, we generated net sales of $7.143 billion, as compared to $7.249 billion in 2012, a decrease of $106 million, or one percent. Our net sales were unfavorably impacted by $156 million from foreign currency fluctuations in 2013 as compared to 2012 and sales related to our divested Neurovascular business declined $64 million in 2013. Refer to Note C - Divestitures included in Item 8 of this Annual Report for additional information on the Neurovascular divestiture. Excluding the impact of foreign currency and sales from divested businesses, our net sales increased $114 million, or two percent, as compared to the prior year. This increase was due primarily to constant currency increases in net sales from our Endoscopy business of $89 million, from our Neuromodulation business of $87 million, and from our Peripheral Interventions business of $43 million. These increases were partially offset by a constant currency decrease in net sales from our Interventional Cardiology business of $124 million.1 Refer to the Business and Market Overview section for further discussion of our sales results.
Our reported net loss in 2013 was $121 million, or $0.09 per share. Our reported results for 2013 included goodwill and intangible asset impairment charges; acquisition- and divestiture-related net charges; restructuring- and litigation-related charges; debt extinguishment charges; discrete tax items; and amortization expense (after-tax) of $1.112 billion, or $0.82 per share. Excluding these items, net income for 2013 was $991 million, or $0.73 per share1.
Our reported net loss in 2012 was $4.068 billion, or $2.89 per share. Our reported results for 2012 included goodwill and intangible asset impairment charges; acquisition- and divestiture-related net credits; restructuring- and litigation-related charges; discrete tax items; and amortization expense (after-tax) of $5.001 billion, or $3.55 per share. Excluding these items, net income for 2012 was $933 million, or $0.66 per share1. The following is a reconciliation of our results of operations prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) to those adjusted results considered by management. Refer to Results of Operations for a discussion of each reconciling item:

                                                          Year Ended December 31, 2013
                                                              Tax                      Impact per
in millions, except per share data            Pre-Tax       Impact       After-Tax        share
GAAP net income (loss)                       $   (223 )   $     102     $    (121 )   $     (0.09 )
Non-GAAP adjustments:
Goodwill and other intangible asset
impairment charges                                476            (8 )         468            0.35   *
Acquisition- and divestiture-related net
charges                                             1             3             4            0.00   *
Restructuring-related charges                     124           (36 )          88            0.07   *
Litigation-related charges                        221           (72 )         149            0.11   *
Debt extinguishment charges                        70           (26 )          44            0.03   *
Discrete tax items                                  -            (7 )          (7 )         (0.01 ) *
Amortization expense                              410           (44 )         366            0.27   *
Adjusted net income                          $  1,079     $     (88 )   $     991     $      0.73

* Assumes dilution of 19.5 million shares for the year ended December 31, 2013 for all or a portion of these non-GAAP adjustments. 1 Sales growth rates that exclude the impact of sales from divested businesses and/or 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 U.S. GAAP. Refer to Additional Information in this Item 7 for a discussion of management's use of these non-GAAP financial measures.


                                                        Year Ended December 31, 2012
                                                            Tax                      Impact per
in millions, except per share data           Pre-Tax       Impact      After-Tax        share
GAAP net income (loss)                      $ (4,107 )   $     39     $  (4,068 )   $     (2.89 )
Non-GAAP adjustments:
Goodwill and other intangible asset
impairment charges                             4,492          (46 )       4,446            3.15   **
Acquisition- and divestiture-related net
credits                                          (50 )         14           (36 )         (0.02 ) **
Restructuring-related charges                    160          (38 )         122            0.09   **
Litigation-related charges                       192          (74 )         118            0.08   **
Discrete tax items                                 -            2             2            0.00   **
Amortization expense                             395          (46 )         349            0.25   **
Adjusted net income                         $  1,082     $   (149 )   $     933     $      0.66

** Assumes dilution of 7.7 million shares for the year ended December 31, 2012 for all or a portion of these non-GAAP adjustments.
1 Sales growth rates that exclude the impact of sales from divested businesses and/or 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 U.S. GAAP. Refer to Additional Information in this Item 7 for a discussion of management's use of these non-GAAP financial measures.

Cash generated by operating activities was $1.082 billion in 2013, as compared to $1.260 billion in 2012. Our cash generated from operations continues to be a significant source of funds for investing in our growth and returning value to shareholders by buying back shares of our common stock pursuant to our share repurchase authorizations discussed in Note L - Stockholders' Equity to our 2013 consolidated financial statements contained in Item 8 of this Annual Report. During 2013, we used $500 million of cash generated from operations to repurchase approximately 51 million shares of our common stock, as compared to 2012 in which $600 million of cash generated from operations was used to repurchase approximately 105 million shares of our common stock. As of December 31, 2013, we had total debt of $4.240 billion, cash and cash equivalents of $217 million and working capital of $1.187 billion. We hold investment-grade ratings with all three major credit-rating agencies. We believe our investment grade credit profile reflects the size and diversity of our product portfolio, our leading share position in several of our served markets, our strong cash flow, our solid financial fundamentals and our financial strategy.


Business and Market Overview
Cardiovascular
Interventional Cardiology
Our Interventional Cardiology division develops, manufactures and markets technologies for diagnosing and treating coronary artery disease and other cardiovascular disorders. Product offerings include coronary stents, including drug-eluting and bare metal stent systems, balloon catheters, rotational atherectomy systems, guide wires, guide catheters, embolic protection devices, crossing and re-entry devices for the treatment of chronically occluded coronary vessels, diagnostic catheters used in percutaneous transluminal coronary angioplasty procedures, and intravascular ultrasound (IVUS) imaging systems. 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. In the fourth quarter of 2013, we received FDA approval and launched Promus PREMIER™ in the U.S. The Promus PREMIER™ Stent System is designed to provide physicians improved drug-eluting stent performance in treating patients with coronary artery disease, featuring unique customized platinum chromium alloy stent architecture and an enhanced stent delivery system. We have also received CE Mark approval for our next generation SYNERGY™ Everolimus-Eluting Platinum Chromium Coronary Stent System featuring an ultra-thin abluminal (outer) bioabsorbable polymer coating and have commenced a limited commercial launch. We expect to expand the launch in Europe in the first half of 2014. The SYNERGY Stent is unique in that its proprietary polymer and everolimus drug coating dissipate by 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 have completed patient enrollment 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 Administration and Japanese regulatory approvals for this technology. Our worldwide net sales of Interventional Cardiology products were $1.997 billion for the year ended December 31, 2013, or approximately 28 percent of our consolidated net sales for the year ended December 31, 2013. Our worldwide net sales of Interventional Cardiology products decreased $182 million, or eight percent, in 2013, as compared to 2012. Excluding the impact of changes in foreign currency exchange rates, which had a $58 million negative impact on our Interventional Cardiology net sales in 2013, as compared to 2012, net sales of these products decreased $124 million, or six percent. This decrease was primarily due to lower coronary stent system sales, partially offset by higher sales of our non-stent Interventional Cardiology products. 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:

                             Year Ended                              Year Ended
(in millions)             December 31, 2013                       December 31, 2012
                 U.S.      International      Total      U.S.      International      Total
Drug-eluting    $  448    $           665    $ 1,113    $  557    $           720    $ 1,277
Bare-metal          19                 45         64        24                 62         86
                $  467    $           710    $ 1,177    $  581    $           782    $ 1,363

Worldwide net sales of our coronary stent systems, with the inclusion of bare-metal stent systems, were $1.177 billion or approximately 16 percent of our consolidated net sales in 2013. Our worldwide net sales of these products decreased $186 million, or 14 percent, in 2013, as compared to 2012. Our U.S. net sales of drug-eluting stent systems decreased $109 million, or 20 percent, in 2013, as compared to 2012. This decrease was primarily related to lower market share due to competitive launches in 2012, continued average selling price declines in the U.S. DES market as a result of continued competitive pressures and declines in procedural volumes. Our international drug-eluting stent system net sales decreased $55 million, or eight percent, in 2013, as compared to the previous year, due to continued lower market share related to competitive launches.
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 coronary stent market for a variety of reasons, including:
• the performance benefits of our current and future technology;

• the strength of our pipeline of drug-eluting stent 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.

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

• the impact and outcomes of on-going and future clinical trials 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;

• 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 have developed a fully repositionable and retrievable device for transcatheter aortic valve replacement 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. In April 2013, we completed enrollment in the REPRISE II clinical trial to evaluate the safety and performance of the Lotus™ Valve System. In October 2013, we received CE Mark approval and launched the Lotus ™ Valve System in Europe.
In 2013 and 2012, we recorded intangible asset impairment charges related to the Sadra in-process research and development intangible assets. Refer to Results of Operations for further details.
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. In the first half of 2013, we submitted the results of the US IDE trial, PREVAIL, to the FDA. The FDA Circulatory System Device Panel met in December of 2013 and voted favorably by a majority, Yes: 13, No:1, that there is reasonable assurance the device is safe, there is reasonable assurance of efficacy, and the benefits of the WATCHMAN® LAA Closure Device outweigh the risks. We expect FDA approval of the device in the first half of 2014. We are leveraging expertise from both our Electrophysiology and Interventional Cardiology businesses in the commercialization of the WATCHMAN® LAA Closure Device.

Peripheral Interventions

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 $789 million in 2013, as compared to $774 million in 2012, an increase of $15 million, or two percent. Excluding the $28 million of negative impact from changes in foreign currency exchange rates, our worldwide PI net sales increased $43 million, or six percent, in 2013 as compared to 2012. The year-over-year increase in worldwide PI net sales was primarily driven by growth in our core PI franchise as a result of new product launches in stents and balloons, as well as the launch of the Vessix renal denervation system in Europe.


During the fourth quarter of 2012, we completed the acquisition of Vessix, 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 launched this technology in Europe in May 2013. We plan to carefully examine the forthcoming available data from a competitor's recently completed U.S. pivotal trial in renal denervation for treatment-resistant hypertension, with respect to which the competitor announced in January 2014 that it failed to meet its primary efficacy endpoint. We plan to work collaboratively with the scientific community to determine the next steps for the design of our Vessix clinical program.
Rhythm Management
Cardiac Rhythm Management

Our CRM division develops, manufactures and markets a variety of implantable devices including implantable cardioverter defibrillator systems and pacemaker systems that monitor the heart and deliver electricity to treat cardiac abnormalities. Worldwide net sales of our CRM products of $1.886 billion represented approximately 27 percent of our consolidated net sales for 2013. Our worldwide CRM net sales decreased $22 million, or one percent, in 2013, as compared to the prior year. Excluding the impact of changes in foreign currency exchange rates our 2013 worldwide CRM net sales decreased $8 million, or less than one percent, as compared to 2012. Our U.S. CRM net sales increased $3 million, or less than one percent, in 2013 as compared to 2012. Our international CRM net sales decreased $25 million, or three percent, in 2013, as compared to 2012, and included a $14 million negative impact from changes in foreign currency exchange rates.
The following are the components of our worldwide CRM net sales:

                                  Year Ended                               Year Ended
(in millions)                 December 31, 2013                        December 31, 2012
                      U.S.      International      Total       U.S.      International      Total
ICD systems         $   850    $           505    $ 1,355    $   858    $           521    $ 1,379
Pacemaker systems       267                264        531        256                273        529
CRM products        $ 1,117    $           769    $ 1,886    $ 1,114    $           794    $ 1,908

The reduction in our worldwide CRM net sales during 2013 as compared to 2012 was principally the result of a decrease in net sales of our defibrillator systems due to the impact of average selling price pressures driven by governmental, competitive and other pricing pressures partially offset by slight increases in unit volumes. Our pacemaker system net sales increased less than one percent during 2013 as compared to 2012 due to the continued strong performance of our INGENIO family of pacemaker systems.

During the second quarter of 2012, we completed the acquisition of Cameron Health, Inc. 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. We became supply constrained in early March 2013 and were only able to provide a very limited supply of S-ICD systems during the second and third quarters of 2013. We continued to make progress in our efforts to enhance the S-ICD supply chain; and in the fourth quarter of 2013 we were able to resume our launch of our S-ICD system.

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 the results of our consolidated operations. Variables that may impact the size of the CRM market and/or our share of that market include, but are not limited to:

• our ability to timely and successfully acquire or develop and launch 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;

• 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;

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

• delayed or limited regulatory approvals and unfavorable reimbursement policies.

During 2013, 2012 and 2011, we have recorded goodwill impairment charges related to our CRM business unit. Refer to Results of Operations for further discussion of these charges.
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 performance and responsiveness. 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 $155 million in 2013, as compared to $147 million in 2012, an increase of approximately $8 million, or five percent. Excluding the $2 million negative impact from changes in foreign currency exchange rates, our worldwide Electrophysiology net sales increased $10 million, or seven percent, in 2013, as compared to 2012. The increase in worldwide Electrophysiology net sales was due to the acquisition of the electrophysiology business of C.R. Bard Inc. which produced $15 million of sales during the fourth quarter of 2013.

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 received CE Mark approval for the Rhythmia technology during the second quarter of 2013 and received FDA approval during July 2013, and expect to launch the product in 2014.

On November 1, 2013, we completed the acquisition of the electrophysiology business of C.R. Bard Inc. (Bard EP). We believe that this transaction brings a strong commercial team and complementary portfolio of ablation catheters, diagnostic tools, and electrophysiology recording systems, and will allow us to better serve the global Electrophysiology market through a more comprehensive portfolio offering and sales infrastructure.

We believe that the Rhythmia and Bard EP acquisitions, as well as our other expected product launches, will help to position us to participate more competitively in the fast-growing Electrophysiology market. MedSurg
Endoscopy

Our Endoscopy division develops and manufactures devices to treat a variety of medical conditions including diseases of the digestive and pulmonary systems. Our worldwide net sales of these products were $1.300 billion in 2013, as compared to $1.252 billion in 2012, an increase of $48 million, or four percent. Excluding the $41 million negative impact from changes in foreign currency exchange rates, our worldwide Endoscopy net sales increased $89 million, or seven percent, in 2013, as compared to 2012. This performance was primarily the result of growth across several of our key product franchises, including our hemostasis franchise on the continued adoption and utilization of our Resolution Clip for gastrointestinal bleeding; our biliary device franchise driven by our endoscopic ultrasound platform and recent launches within our biliary access and retrieval product lines; our metal stent franchise driven by our WallFlex® product family; and improved adoption of the Alair® Bronchial Thermoplasty system.
In 2010, we completed our acquisition of Asthmatx, Inc., which added to our Endoscopy portfolio a less-invasive, catheter-based bronchial thermoplasty procedure for the treatment of severe persistent asthma. The Alair® Bronchial Thermoplasty System, developed by Asthmatx, has CE Mark, China Food and Drug Administration and U.S. FDA approval and is the first device-based asthma treatment approved by the FDA. Beginning January 1, 2013, the America Medical Association Current Procedural Terminology editorial panel assigned category I CPT codes specifically for bronchial thermoplasty. The Category I CPT procedure codes are recognized by all public and private health insurance payers in the United States, which will allow physicians and hospitals to seek reimbursement for bronchial thermoplasty procedures. In addition, during the third quarter of 2013, the five-year data from the AIR2 clinical trial were published in the Journal of Allergy and Clinical Immunology, which showed that the Alair System provided long-term asthma control, demonstrated by a sustained reduction in the rate of severe exacerbations and emergency room visits over a five year period after treatment. We expect that the Alair technology will continue to strengthen our existing offering of pulmonary devices and contribute to future sales growth and diversification of the Endoscopy business.


Urology and Women's Health

Our Urology and Women's Health division develops and manufactures devices to treat various urological and gynecological disorders. Our worldwide net sales of these products were $505 million in 2013, as compared to $500 million in 2012, an increase of approximately $5 million, or one percent. Excluding the $12 million negative impact from changes in foreign currency exchange rates, our worldwide Urology and Women's Health net sales increased $17 million, or three percent, in 2013, as compared to 2012. The increase in worldwide Urology and Women's Health net sales was primarily due to new product launches and growth in the international business as a result of our global commercial expansion. Neuromodulation

Our Neuromodulation business offers the Precision® and Precision SpectraTM Spinal Cord Stimulator systems, used for the management of chronic pain. Our . . .

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