Fitch: Boston Scientific's Settlement Reduces Liability Risk but Also Liquidity

Boston Scientific Corp.'s (NYSE:BSX) ratings are unaffected by its recent settlement with Johnson & Johnson (NYSE:JNJ) regarding litigation associated with BSX's acquisition of Guidant in 2006, according to Fitch Ratings.

The settlement calls for BSX to pay $600 million to JNJ during 2015. BSX will make two $300 million dollar payments, primarily using balance sheet cash without taking on any additional long-term debt. The agreement removes any further litigation regarding this matter.

While Fitch views the settlement as a positive development in terms of reducing the uncertainty surrounding the potential financial liability from the lawsuit, the $600 million dollar payment will reduce the availability of cash in the short term. Nevertheless, Fitch believes that BSX will maintain adequate liquidity through FCF generation, balance sheet cash and access to its revolving credit facility. As such, BSX will be able to operate competitively with expected improving operations and without stressing its balance sheet.

In the lawsuit against BSX, JNJ alleged that Guidant knowingly violated their acquisition agreement with JNJ by providing due diligence activities to Abbott Laboratories (Abbott), particularly regarding its drug eluting stent platform. JNJ stated that BSX would not have succeeded in acquiring Guidant, had Guidant not provided that information to Abbott. Both sides presented their arguments in U.S. District Court and were awaiting the judge's decision. The uncertainty regarding the judge's ruling the prospects for a continued legal battle likely helped motivate both sides to settle the dispute.

The $600 million cash settlement is within the range of Fitch's forecasts and was incorporated in the company's current credit rating.

RATING SENSITIVITIES:

Positive: Future developments that may, individually or collectively, lead to positive rating action include the following:

--Continued operational improvements that support long-term positive revenue growth and margin stability/improvement;

--An operational profile that could lead to significant and durable increases in FCF;

--Cash deployment policy and resulting capital structure that would durably sustain leverage below 2.2 times (x)-2.3x.

Negative: Future developments that may, individually or collectively, lead to negative rating action include the following:

--Material and lasting deterioration in operations and FCF;

--Persistent increase in leverage approaching 3.0x;

--Leveraging acquisitions without the prospect of timely debt/leverage reduction;

--Large legal settlement(s) that would need to be funded with significant debt issuance(s).

RATINGS:

Fitch currently rates Boston Scientific Corp. as follows:

--Long-term IDR 'BBB-';

--Unsecured bank credit facility 'BBB-';

--Senior unsecured notes 'BBB-'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

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