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BSX > SEC Filings for BSX > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for BOSTON SCIENTIFIC CORP

Form 10-Q for BOSTON SCIENTIFIC CORP


6-Aug-2014

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.
Financial Summary
Three Months Ended June 30, 2014
Our net sales for the second quarter of 2014 were $1.873 billion, as compared to net sales of $1.809 billion for the second quarter of 2013, an increase of $64 million, or four percent. Excluding the impact of changes in foreign currency exchange rates, which had a $5 million positive impact on our second quarter 2014 net sales as compared to the same period in the prior year, and the decrease in net sales from divested businesses of $18 million, our net sales increased $77 million, or four percent.1 Refer to Quarterly Results and Business Overview for a discussion of our net sales by global business.
Our reported net income for the second quarter of 2014 was $4 million, or $0.00 per share. Our reported results for the second quarter of 2014 included intangible asset impairment charges, acquisition- and divestiture-related net credits, litigation-related net charges, restructuring and restructuring-related charges, discrete tax items, and amortization expense totaling $281 million (after-tax), or $0.21 per share. Excluding these items, net income for the second quarter of 2014 was $285 million, or $0.21 per share.1 Our reported net income for the second quarter of 2013 was $130 million, or $0.10 per share. Our reported results for the second quarter of 2013 included intangible asset impairment charges, acquisition- and divestiture-related net credits, restructuring and restructuring-related charges, and amortization expense totaling $117 million (after-tax), or $0.08 per share. Excluding these items, net income for the second quarter of 2013 was $247 million, or $0.18 per share.1

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 for a discussion of management's use of these non-GAAP financial measures.


Table of Contents

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 and Business Overview for a discussion of each reconciling item:

                                                        Three Months Ended June 30, 2014
                                                                Tax                      Impact per
in millions, except per share data            Pre-Tax         Impact       After-Tax       share
GAAP net income (loss)                      $    (104 )     $     108     $       4     $     0.00
Non-GAAP adjustments:
Intangible asset impairment charges               110             (19 )          91           0.07
Acquisition- and divestiture-related net
credits                                           (91 )            (1 )         (92 )        (0.07 )
Restructuring and restructuring-related
net charges                                        25              (6 )          19           0.01
Discrete tax items                                  -              (2 )          (2 )         0.00
Litigation-related net charges                    267            (100 )         167           0.13
Amortization expense                              109             (11 )          98           0.07
Adjusted net income                         $     316       $     (31 )   $     285     $     0.21




                                                         Three Months Ended June 30, 2013
                                                                Tax                        Impact per
in millions, except per share data            Pre-Tax          Impact        After-Tax       share
GAAP net income (loss)                      $     152       $     (22 )     $     130     $     0.10
Non-GAAP adjustments:
Intangible asset impairment charges                53              (8 )            45           0.03
Acquisition- and divestiture-related net
credits                                           (44 )             7             (37 )        (0.03 )
Restructuring and restructuring-related
net charges                                        31              (8 )            23           0.02
Amortization expense                              101             (15 )            86           0.06
Adjusted net income                         $     293       $     (46 )     $     247     $     0.18

Cash provided by operating activities was $286 million in the second quarter of 2014, as compared to $396 million in the second quarter of 2013. As of June 30, 2014, we had total debt of $4.255 billion, cash and cash equivalents of $357 million and working capital of $1.441 billion. Refer to Liquidity and Capital Resources for further discussion.
Six Months Ended June 30, 2014
Our net sales for the first half of 2014 were $3.647 billion, as compared to net sales of $3.570 billion for the first half of 2013, an increase of $77 million, or two percent. Excluding the impact of changes in foreign currency exchange rates, which had a $20 million negative impact on our net sales for the six months ended June 30, 2014 as compared to the same period in the prior year, and the decrease in net sales from divested businesses of $52 million, our net sales increased $149 million, or four percent.1 Refer to Quarterly Results and Business Overview for a discussion of our net sales by global business. Our reported net income for the first half of 2014 was $137 million, or $0.10 per share. Our reported results for the first half of 2014 included intangible asset impairment charges, acquisition- and divestiture-related net credits, litigation-related net charges, restructuring and restructuring-related charges, discrete tax items, and amortization expense totaling $416 million (after-tax), or $0.31 per share. Excluding these items, net income for the first half of 2014 was $553 million, or $0.41 per share.1 Our reported net loss for the first half of 2013 was $224 million or $0.17 per share, driven primarily by a goodwill impairment charge related to our global Cardiac Rhythm Management (CRM) business unit. Our reported results for the first half of 2013 included goodwill and intangible asset impairment charges, acquisition- and divestiture-related net credits, restructuring and restructuring-related and litigation-related net charges, and amortization expense totaling $695 million (after-tax), or $0.52 per share. Excluding these items, net income for the first half of 2013 was $471 million, or $0.35 per share.1
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 for a discussion of management's use of these non-GAAP financial measures.


Table of Contents

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 and Business Overview for a discussion of each reconciling item:

                                                           Six Months Ended June 30, 2014
                                                                  Tax                      Impact per
in millions, except per share data              Pre-Tax         Impact       After-Tax       share
GAAP net income (loss)                        $      42       $      95     $     137     $     0.10
Non-GAAP adjustments:
Intangible asset impairment charges                 165             (25 )         140           0.10
Acquisition- and divestiture-related net
credits                                            (118 )            (2 )        (120 )        (0.09 )
Restructuring and restructuring-related net
charges                                              53             (13 )          40           0.03
Discrete tax items                                    -               -             -           0.00
Litigation-related net charges                      260             (99 )         161           0.12
Amortization expense                                218             (23 )         195           0.15
Adjusted net income                           $     620       $     (67 )   $     553     $     0.41




                                                                  Six Months Ended June 30, 2013
                                                                        Tax                             Impact per
in millions, except per share data                 Pre-Tax            Impact           After-Tax           share
GAAP net income (loss)                         $       (242 )      $       18       $        (224 )    $     (0.17 )
Non-GAAP adjustments:
Goodwill impairment charge                              423                (2 )               421             0.31   *
Intangible asset impairment charges                      53                (8 )                45             0.03   *
Acquisition- and divestiture-related net
credits                                                 (72 )              10                 (62 )          (0.05 ) *
Restructuring and restructuring-related net
charges                                                  46               (12 )                34             0.03   *
Litigation-related charges                              130               (48 )                82             0.06   *
Amortization expense                                    204               (29 )               175             0.14   *
Adjusted net income                            $        542        $      (71 )     $         471      $      0.35

*Assumes dilution of 14.0 million shares for the six months ended June 30, 2013 for all or a portion of these non-GAAP adjustments.

Cash provided by operating activities was $483 million in the first half of 2014, as compared to $584 million in the first half of 2013. During the first half of 2014, we used $125 million of cash generated from operations to repurchase approximately 10 million shares of our common stock.


Table of Contents

Quarterly Results and Business Overview
Net Sales
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. 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. 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
                                            June 30,                As Reported     Constant
                                                                     Currency       Currency
(in millions)                         2014             2013            Basis         Basis
                                                    (restated)
   Interventional Cardiology    $      528         $        520          2     %       1    %
   Peripheral Interventions            211                  204          3     %       3    %
Cardiovascular                         739                  724          2     %       2    %

   Cardiac Rhythm Management           497                  475          5     %       4    %
   Electrophysiology                    56                   36         55     %      54    %
Rhythm Management                      553                  511          8     %       7    %

   Endoscopy                           333                  320          4     %       4    %
   Urology and Women's Health          133                  124          7     %       7    %
   Neuromodulation                     114                  111          3     %       3    %
 MedSurg                               580                  555          5     %       5    %

Subtotal Core Businesses             1,872                1,790          5     %       4    %
Divested Businesses                      1                   19        (93 )   %     (93 )  %
Worldwide                       $    1,873         $      1,809          4     %       4    %

We restated segment information for the prior period to reflect the realignment of certain product lines from Endoscopy to Peripheral Interventions as of January 1, 2014.

Growth rates are based on actual, non-rounded amounts and may not recalculate precisely.


Table of Contents

                                                                        Change
                                     Six Months Ended
                                         June 30,              As Reported     Constant
                                                                Currency       Currency
(in millions)                      2014           2013            Basis         Basis
                                               (restated)
   Interventional Cardiology    $    1,025    $      1,025          0 %   %       1    %
   Peripheral Interventions            414             400          3     %       4    %
Cardiovascular                       1,439           1,425          1     %       2    %

   Cardiac Rhythm Management           963             953          1     %       1    %
   Electrophysiology                   114              71         61     %      60    %
Rhythm Management                    1,077           1,024          5     %       5    %

   Endoscopy                           647             624          4     %       5    %
   Urology and Women's Health          258             242          7     %       8    %
   Neuromodulation                     223             200         12     %      12    %
 MedSurg                             1,128           1,066          6     %       7    %

Subtotal Core Businesses             3,644           3,515          4     %       4    %
Divested Businesses                      3              55        (94 )   %     (94 )  %
Worldwide                       $    3,647    $      3,570          2     %       2    %

We restated segment information for the prior period to reflect the realignment of certain product lines from Endoscopy to Peripheral Interventions as of January 1, 2014.

Growth rates are based on actual, non-rounded amounts and may not recalculate precisely.
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. We also offer structural heart products in certain international markets, which include a device for transcatheter aortic valve replacement and a device designed to close the left atrial appendage.


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Our worldwide net sales of Interventional Cardiology products were $528 million in the second quarter of 2014, or approximately 28 percent of our consolidated net sales in the second quarter of 2014. Our worldwide net sales of Interventional Cardiology products increased $8 million, or two percent, in the second quarter of 2014, as compared to the same period in 2013. Excluding the impact of changes in foreign currency exchange rates, which had a $1 million positive impact on our Interventional Cardiology net sales in the second quarter of 2014, as compared to the same period in the prior year, net sales of these products increased $7 million, or one percent. This increase was primarily related to sales of our Promus PREMIER™ Stent System in the U.S., our structural heart products in international markets, including the Lotus™ transcatheter aortic valve replacement system and the WATCHMAN® left atrial appendage closure device, along with operational growth in our other cardiology product lines. The Lotus™ Valve System consists of a stent-mounted tissue valve prosthesis and catheter delivery system for guidance and placement of the valve. 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. The WATCHMAN® left atrial appendage closure technology is the first device studied in a randomized clinical trial to offer an alternative to anticoagulant drugs, and is marketed in CE Mark and other international countries. In the U.S., we completed the 18 month follow-up PREVAIL trial and final 5 year follow-up in the PROTECT AF trial to evaluate the safety and efficacy of the WATCHMAN® device in patients with nonvalvular atrial fibrillation versus long-term warfarin therapy and are working towards FDA approval of the device. During the second quarter of 2014, we were informed by the FDA that another Circulatory System Devices Panel would be convened in October 2014 to review the WATCHMAN® clinical evidence. As a result, our goal for U.S. FDA approval and launch of this technology is now the first half of 2015. Due to the revised expectations and timing for the U.S. launch, we recorded impairment charges related to the WATCHMAN® device in-process research and development intangible assets during the second quarter of 2014. Refer to Intangible Asset Impairment Charges for further details. 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)                 June 30, 2014                               June 30, 2013
                    U.S.        International      Total        U.S.        International      Total
Drug-eluting    $   127        $           171    $  298    $   117        $           170    $  287
Bare-metal            4                      8        12          5                     12        17
                $   131        $           179    $  310    $   122        $           182    $  304

Our worldwide net sales of coronary stent systems increased $6 million, or two percent, in the second quarter of 2014, as compared to the same period in 2013. Excluding the impact of changes in foreign currency exchange rates, which had a $1 million negative impact on our coronary stent system net sales in the second quarter of 2014, compared to the same period in the prior year, net sales of these products increased $7 million, or two percent. This increase was primarily related to market share gains due to the ongoing worldwide roll-out of our Promus PREMIER™ Everolimus-Eluting Platinum Chromium Coronary Stent System and increases in market-wide procedural volumes partially offset by average selling price declines in the drug-eluting stent (DES) market.
In May 2014 we launched our Promus PREMIER™ Everolimus-Eluting Platinum Chromium Coronary Stent System in Japan, following regulatory approval by the Japanese Ministry of Health, Labor and Welfare (MHLW). We had previously launched this technology in Europe and select other geographies during the first quarter of 2013, and in the U.S. during the fourth quarter of 2013. 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 also market our next generation SYNERGY™ Everolimus-Eluting Platinum Chromium Coronary Stent System in select European and other CE Mark countries, which features an ultra-thin abluminal (outer) bioabsorbable polymer coating. During the first half of 2014, we continued to expand our commercial launch of this technology in Europe. 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. 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 $211 million in the second quarter of 2014, as compared to $204 million in the second quarter of 2013, an increase of $7 million, or three percent. Excluding the impact of changes in foreign currency exchange rates, which had a $1 million positive impact on our PI net sales in the second quarter of 2014, as compared to the same period in the prior year, net sales of these products increased $6 million, or three percent. The


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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 in PI.
During the fourth quarter of 2012, we completed the acquisition of Vessix, a developer of catheter-based renal denervation systems for the treatment of resistant 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 have seen a slowdown in the resistant hypertension market in Europe following the failure of a competitor's large randomized clinical trial, which was announced during the first quarter of 2014. During the second quarter of 2014, based on a careful examination of the available data, we determined we would not pursue a global pivotal trial as previously designed. As a result of changes in our clinical strategy and lower estimates of the European and global hypertension markets, we reduced our expectations for future revenue and recorded impairment charges related to the Vessix technology intangible assets during the first and second quarter of 2014. Refer to Intangible Asset Impairment Charges for further details. 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 $497 million in the second quarter of 2014 represented approximately 27 percent of our consolidated net sales for the second quarter of 2014. Our worldwide CRM net sales increased $22 million, or five percent, in the second quarter of 2014, as compared to the same period in the prior year. Excluding the impact of changes in foreign currency exchange rates, which had a $3 million positive impact on our second quarter 2014 CRM net sales, as compared to the same period in the prior year, our CRM net sales increased $19 million, or four percent. The following are the components of our worldwide CRM net sales:

                                     Three Months Ended                                     Three Months Ended
(in millions)                          June 30, 2014                                          June 30, 2013
                          U.S.           International         Total             U.S.           International         Total
ICD systems         $       223        $           132     $       355     $       213        $           129     $       342
Pacemaker systems            67                     75             142              69                     64             133
CRM products        $       290        $           207     $       497     $       282        $           193     $       475

The increase in our worldwide CRM net sales during the second quarter of 2014 as compared to the second quarter of 2013 was principally the result of increases in our denovo ICD market share as a result of our subcutaneous implantable cardioverter defibrillator (S-ICD) technology and our new line of defibrillators; partially offset by lower volumes of replacement procedures and implantable cardiac resynchronization therapy defibrillator (CRT-D) market share losses in certain regions. In February 2014, our European business initiated the full launch of our new X4 line of quadripolar CRT-D systems, including the AUTOGEN™ X4, DYNAGEN™ X4, and INOGEN™ X4 cardiac resynchronization therapy defibrillators (CRT-Ds), a suite of ACUITY™ X4 quadripolar LV leads and the ACUITY™ PRO lead delivery system. In addition, in April 2014, we received FDA approval for the DYNAGEN™ MINI and INOGEN™ MINI ICDs, the smallest fully-powered standard longevity ICDs on the market, as well as the DYNAGEN™ X4 and INOGEN™ X4 CRT-Ds. These new defibrillators were launched in the U.S. during the second quarter.
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. 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, and during the fourth quarter of 2013, we resumed our launch of our S-ICD® System.

Our worldwide pacemaker system sales increased during the second quarter of 2014 as compared to the second quarter of 2013 primarily due to the launch of our magnetic resonance imaging (MRI) compatible pacemaker system in Japan during the . . .

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