UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO
SECTION
13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
|
For
the fiscal year ended December 31, 2008
|
Commission
File No. 1-11083
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BOSTON
SCIENTIFIC CORPORATION
(Exact
Name Of Company As Specified In Its Charter)
|
DELAWARE
|
04-2695240
|
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification No.)
|
ONE
BOSTON SCIENTIFIC PLACE, NATICK, MASSACHUSETTS 01760-1537
(Address
Of Principal Executive Offices)
(508)
650-8000
(Company’s
Telephone Number)
Securities
registered pursuant to Section 12(b) of the Act:
|
COMMON
STOCK, $.01 PAR VALUE PER SHARE
|
NEW
YORK STOCK EXCHANGE
|
|
(Title
Of Class)
|
(Name
of Exchange on Which Registered)
|
Securities
registered pursuant to Section 12(g) of the Act:
NONE
________________
Indicate
by check mark if the Company is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes:
x No
o
Indicate
by check mark if the Company is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.
Yes:
o No
x
Indicate
by check mark whether the Company (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 Company 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Company’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company as
defined in Rule 12b-2 of the Exchange Act. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
|
Large Accelerated
Filer x
|
Accelerated
Filer o
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Non-Accelerated
Filer o
|
Smaller Reporting
Company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes:
o No
x
The
aggregate market value of the Company’s common stock held by non-affiliates of
the Company was approximately $16.8 billion based on the closing price of the
Company’s common stock on June 30, 2008, the last business day of the Company’s
most recently completed second fiscal quarter.
The
number of shares outstanding of the Company’s common stock as of January 31,
2009 was 1,502,237,400.
TABLE
OF CONTENTS
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PART
I
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3
|
||
| ITEM 1. |
BUSINESS
|
3
|
|
| ITEM 1A. |
RISK
FACTORS
|
24
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|
| ITEM 1B. |
UNRESOLVED
STAFF COMMENTS
|
34
|
|
| ITEM 2. |
PROPERTIES
|
35
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|
| ITEM 3. |
LEGAL
PROCEEDINGS
|
35
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|
| ITEM 4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
35
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|
|
PART
II
|
36
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||
| ITEM 5. |
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
36
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| ITEM 6. |
SELECTED
FINANCIAL DATA
|
38
|
|
| ITEM 7. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
39
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| ITEM 7A. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
74
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| ITEM 8. |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
76
|
|
| ITEM 9. |
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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148
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| ITEM 9A. |
CONTROLS
AND PROCEDURES
|
148
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| ITEM 9B. |
OTHER
INFORMATION
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148
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PART
III
|
149
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| ITEM 10. |
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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149
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| ITEM 11. |
EXECUTIVE
COMPENSATION
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157
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| ITEM 12. |
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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157
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| ITEM 13. |
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
157
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| ITEM 14. |
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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157
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|
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PART
IV
|
158
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||
| ITEM 15. |
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
158
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|
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SIGNATURES
|
165
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||
2
PART
I
ITEM
1. BUSINESS
The
Company
Boston
Scientific Corporation is a worldwide developer, manufacturer and marketer of
medical devices that are used in a broad range of interventional medical
specialties including interventional cardiology, cardiac rhythm management,
peripheral interventions, electrophysiology, neurovascular intervention,
endoscopy, urology, gynecology and neuromodulation. When used in this report,
the terms “we,” “us,” “our” and “the Company” mean Boston Scientific Corporation
and its divisions and subsidiaries.
Since we
were formed in 1979, we have advanced the practice of less-invasive medicine by
helping physicians and other medical professionals treat a variety of diseases
and improve patients’ quality of life by providing alternatives to surgery and
other medical procedures that are typically traumatic to the body. Some of the
uses of our products include: enlarging narrowed blood vessels to prevent heart
attack and stroke; clearing passages blocked by plaque to restore blood flow;
detecting and managing fast, slow or irregular heart rhythms; mapping electrical
problems in the heart; performing biopsies and intravascular ultrasounds;
placing filters to prevent blood clots from reaching the lungs, heart or brain;
treating urological, gynecological, renal, pulmonary, neurovascular and
gastrointestinal diseases; and modulating nerve activity to treat chronic
pain.
Our
history began in the late 1960s when our co-founder, John Abele, acquired an
equity interest in Medi-tech, Inc., a research and development company
focused on developing alternatives to surgery. Medi-tech introduced its initial
products in 1969, a family of steerable catheters used in some of the first
less-invasive procedures performed. In 1979, John Abele joined with Pete
Nicholas to form Boston Scientific Corporation, which indirectly acquired
Medi-tech. This acquisition began a period of active and focused marketing, new
product development and organizational growth. Since then, our net sales have
increased substantially, growing from $2 million in 1979 to approximately
$8.1 billion in 2008.
Our
growth has been fueled in part by strategic acquisitions and alliances designed
to improve our ability to take advantage of growth opportunities in the medical
device industry. On April 21, 2006, we consummated our acquisition of Guidant
Corporation. With this acquisition, we became a major provider in the cardiac
rhythm management (CRM) market, enhancing our overall competitive position
and long-term growth potential and further diversifying our product portfolio.
This acquisition has established us as one of the world’s largest cardiovascular
device companies and a global leader in microelectronic therapies. This and
other strategic acquisitions have helped us to add promising new technologies to
our pipeline and to offer one of the broadest product portfolios in the world
for use in less-invasive procedures. We believe that the depth and breadth of
our product portfolio has also enabled us to compete more effectively in, and
better absorb the pressures of, the current healthcare environment of cost
containment, managed care, large buying groups, government contracting and
hospital consolidation and will generally assist us in navigating the current
turmoil in the global economic markets.
Information
including revenues, measures of profits or losses and total assets for each of
our geographic segments, as well as net sales by business unit, appears in Note P – Segment Reporting to our
2008 consolidated financial statements included in Item 8 of this Annual
Report.
The
Cardiac Rhythm Management (CRM) Opportunity
3
treat
cardiac abnormalities, including:
|
•
|
Implantable
cardiac defibrillator (ICD) systems used to detect and treat abnormally
fast heart rhythms (tachycardia) that could result in sudden cardiac
death, including implantable cardiac resynchronization therapy
defibrillator (CRT-D) systems used to treat heart failure;
and
|
|
•
|
Implantable
pacemaker systems used to manage slow or irregular heart rhythms
(bradycardia), including implantable cardiac resynchronization therapy
pacemaker (CRT-P) systems used to treat heart
failure.
|
Tachycardia
(abnormally fast or chaotic heart rhythms) prevents the heart from pumping blood
efficiently and can lead to sudden cardiac death. Our ICD systems
(defibrillators, leads, programmers, our LATITUDE® Patient Management System and
accessories) monitor the heart and deliver electrical energy, restoring a normal
rhythm. Our defibrillators deliver tiered therapy—a staged progression from
lower intensity pacing pulses designed to correct the abnormal rhythm to more
aggressive shocks to restore a heartbeat. In 2008, we successfully launched our
COGNIS® CRT-D and TELIGEN® ICD implantable defibrillators, which are small,
thin, high-energy devices, in the U.S. and our EMEA (Europe/Middle East/Africa)
region, as well as in certain Inter-Continental countries.
Heart
failure (the heart’s inability to pump effectively) is a debilitating,
progressive condition, with symptoms including shortness of breath and extreme
fatigue. Statistics show that one in five persons die within the first year of a
heart failure diagnosis, and patients with heart failure suffer sudden cardiac
death at six to nine times the rate of the general population. The condition is
pervasive, with approximately five million people in the U.S.
affected.
Bradycardia
(slow or irregular heart rhythms) often results in a heart rate
insufficient to provide adequate blood flow throughout the body, creating
symptoms such as fatigue, dizziness and fainting. Our cardiac pacemaker systems
(pulse generators, leads, programmers and accessories) deliver electrical energy
to stimulate the heart to beat more frequently and regularly. Pacemakers range
from conventional single-chamber devices to more sophisticated adaptive-rate,
dual-chamber devices.
Our
remote monitoring system, the LATITUDE® Patient Management System, may be placed
in a patient’s home (at their bedside) and reads implantable device information
at times specified by the patient’s physician. The communicator then transmits
the data to a secure Internet server where the physician or other qualified
third party can access this medical information anytime, anywhere. In addition
to automatic device data uploads, the communicator enables a daily
confirmation of the patient’s device status, providing assurance the device is
operating properly. The LATITUDE® Weight Scale and Blood Pressure Monitor is
available as an optional component to the system. Weight and blood pressure data
is captured by the communicator and sent to the secure server for review by the
patient’s physician or other qualified third party. In addition, this weight and
blood pressure information is available immediately to patients in their home to
assist their compliance with the day-to-day and home-based heart failure
instructions prescribed by their physician.
The
Drug-Eluting Stent Opportunity
Our
broad, innovative product offerings have enabled us to become a leader in the
interventional cardiology market. This leadership is due in large part to our
coronary stent product offerings. Coronary stents are tiny, mesh tubes used in
the treatment of coronary artery disease, which are implanted in patients to
prop open arteries and facilitate blood flow to and from the heart. We have
further enhanced the outcomes associated with the use of coronary stents,
particularly the processes that lead to restenosis (the growth of neointimal
tissue within an artery after angioplasty and stenting), through dedicated
internal and external product development, strategic alliances and scientific
research of drug-eluting stent systems. Drug-eluting stent
4
systems
accounted for 20 percent of our net sales in 2008 and 21 percent in
2007. Since our entry into the drug-eluting stent market with the launch of
our proprietary polymer-based paclitaxel-eluting stent technology for reducing
coronary restenosis, the TAXUS® Express²® coronary stent system, in the majority
of our international markets in 2003 and in the U.S. in 2004, we have become the
worldwide leader in the drug-eluting coronary stent market. In 2008,
we launched our second-generation drug-eluting stent system, the TAXUS® Liberté®
stent system; as well as the PROMUS® everolimus-eluting stent system,
supplied to us by Abbott Laboratories, in the U.S. following our earlier
launches in our EMEA and Inter-Continental markets. In January 2009, we
received approval from the Japanese Ministry of Health, Labor and Welfare to
market our TAXUS® Liberté® stent system in Japan, and are planning to launch the
TAXUS® Liberté® stent system in Japan during the first quarter of
2009. We expect to launch the PROMUS® stent system in Japan in the second half
of 2009, subject to regulatory approval. We are the only company to offer two
distinct drug-eluting stent platforms, which has enabled us to sustain our
leadership position in the worldwide drug-eluting stent market.
We
continue to develop and enhance our product offerings in the drug-eluting stent
market. In late 2008, we launched our TAXUS® Express²® Atom™
paclitaxel-eluting coronary stent system, a highly deliverable drug-eluting
stent designed for treating small coronary vessels. We expect to
launch an internally developed and manufactured next-generation everolimus-based
stent system, the PROMUS® Element™ platinum chromium coronary stent, in our EMEA
region, as well as in certain Inter-Continental countries, in late 2009 and in
the U.S. and Japan in mid-2012, subject to regulatory approval. Additionally, we
are conducting clinical trials for our third-generation paclitaxel-eluting
stent, the TAXUS® Element™ platinum chromium coronary stent
system.
Business
Strategy
Our
business strategy is to lead global markets for less-invasive medical devices by
developing and delivering products and therapies that address unmet patient
needs, provide superior clinical outcomes and demonstrate compelling economic
value. We intend to achieve leadership, drive profitable sales growth and
increase shareholder value by focusing on the following key
elements:
|
•
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Customers
|
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•
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Innovation
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|
•
|
Quality
|
|
•
|
People
|
|
•
|
Financial
Strength
|
Customers
We
consistently strive to understand and exceed the expectations of our customers.
Each of our business groups maintains dedicated sales forces and marketing teams
focusing on physicians who specialize in the diagnosis and treatment of
different medical conditions. We believe that this focused disease state
management enables us to develop highly knowledgeable and dedicated sales
representatives and to foster close professional relationships with
physicians.
We
believe that we have positive working relationships with physicians and others
in the medical industry, which enable us to gain a detailed understanding of new
therapeutic and diagnostic alternatives and to respond quickly to the changing
needs of physicians and their patients. Active participation in the medical
community contributes to physician understanding and adoption of less-invasive
techniques and the expansion of these techniques into new therapeutic and
diagnostic areas.
Innovation
We offer
products in numerous product categories, which are used by physicians throughout
the world in a broad range of diagnostic and therapeutic procedures. The breadth
and diversity of our product lines permit
5
medical
specialists and purchasing organizations to satisfy many of their less-invasive
medical device requirements from a single source.
We are
committed to harnessing technological innovation through a mixture of tactical
and strategic initiatives that are designed to offer sustainable growth in the
near and long term. Combining internally developed products and technologies
with those obtained through our strategic acquisitions and alliances allows us
to focus on and deliver products currently in our own research and development
pipeline as well as to strengthen our technology portfolio by accessing
third-party technologies.
Our
commitment to innovation is demonstrated further by our clinical capabilities.
Our clinical groups focus on driving innovative therapies aimed at transforming
the practice of medicine. Our clinical teams are organized by therapeutic
specialty to better support our research and development pipeline. During 2008,
our clinical organization planned, initiated and conducted an expanding series
of focused clinical trials that support regulatory and reimbursement
requirements and demonstrated the safe and effective clinical performance of
critical products and technologies.
Quality
Our
commitment to quality and the success of our quality objectives are designed to
build customer trust and loyalty. This commitment to provide quality products to
our customers runs throughout our organization and is one of our most critical
business objectives. In order to strengthen our corporate-wide quality controls,
we established Project Horizon, a cross-functional initiative to improve and
harmonize our overall quality processes and systems. Under Project Horizon,
we made significant improvements to our quality systems, including in the areas
of field action decision-making, corrective and preventative actions, management
controls, process validations and complaint management systems. At
the end of 2007, we formally ended our Project Horizon program and transferred
all open projects to sustaining organizations. In 2008, we implemented the
Quality Master Plan to drive continuous improvement in compliance and quality
performance. In addition, our Compliance and Quality Committee of our Board of
Directors monitors our compliance and quality initiatives. Our efforts on our
quality systems were recognized during the year with the approval of several new
products by the U.S. Food and Drug Administration (FDA) and, in October
2008, the FDA informed us that our quality system is now in substantial
compliance with its Quality System Regulations. Our quality policy, applicable
to all employees, is “I improve the quality of patient care and all things
Boston Scientific.” This personal commitment connects our people with our
quality strategy.
People
We
believe that success and leadership evolve from a motivating corporate culture
that rewards achievement; respects and values individual employees and
customers; and focuses on quality, patient care, integrity, technology and
service. This high performance culture has embraced an intense focus on quality
and doing business with integrity as an important part of our success. Being
honest and fair with each other reflects on everything we do, especially as we
take our quality commitment to new heights. Our Code of Conduct, applicable to
all employees, officers and directors, is the cornerstone of our Corporate
Integrity Program. We believe that our success is attributable in large part to
the high caliber of our employees and our commitment to respecting the values on
which we have based our success.
Financial
Strength
We are
focused on driving profitable sales growth, generating strong cash flow and
actively managing our balance sheet. In 2008, we completed, continued or
commenced several initiatives designed to increase our profitability and provide
better focus on our core businesses and priorities, including:
6
|
•
|
Completed
the sale of non-strategic businesses, consisting of our Auditory, Cardiac
Surgery, Vascular Surgery, Venous Access and Fluid Management businesses,
as well as our TriVascular Endovascular Aortic Repair (EVAR)
program;
|
|
|
•
|
Substantially
completed the sale of non-strategic
investments;
|
|
•
|
Continued
the restructuring of several businesses and product franchises in order to
leverage resources, strengthen competitive positions, and create a more
simplified and efficient business
model;
|
|
•
|
Continued
execution of significant expense and head count
reductions; and
|
|
•
|
Commenced
our Plant Network Optimization plan, a complement to our previously
announced expense and head count reduction plan, which is intended to
simplify our plant network, reduce our manufacturing costs and improve
gross margins.
|
Our goal
was, and continues to be, to better align expenses with revenues, while
preserving our ability to make needed investments in quality, research and
development projects, capital and our people that are essential to our long-term
success. Each of these initiatives are described more fully in our Management’s
Discussion and Analysis included in Item 7 of this Annual Report.
Research
and Development
Our
investment in research and development is critical to driving our future growth.
We have directed our development efforts toward regulatory compliance and
innovative technologies designed to expand current markets or enter new
markets. We believe that streamlining, prioritizing
and coordinating our technology pipeline and new product development activities
are essential to our ability to stimulate growth and maintain leadership
positions in our markets. Our approach to new product design and development is
through focused, cross-functional teams. We believe that our formal process for
technology and product development aids in our ability to offer innovative and
manufacturable products in a consistent and timely manner. Involvement of the
research and development, clinical, quality, regulatory, manufacturing and
marketing teams early in the process is the cornerstone of our product
development cycle. This collaboration allows these teams to concentrate
resources on the most viable and clinically relevant new products and
technologies and bring them to market in a timely manner. In 2009, we expect to
see the benefits of manufacturing value improvement programs as our
manufacturing engineers, many of whom have been focused on quality remediation
over the last few years, are now once again focused on driving significant
manufacturing cost improvement programs. In addition to internal
development, we work with hundreds of leading research institutions,
universities and clinicians around the world to develop, evaluate and clinically
test our products.
We
believe our future success will depend upon the strength of these development
efforts. In 2008, we expended more than $1 billion on research and development,
representing approximately 12 percent of our 2008 net sales. Our investment in
research and development reflects:
|
•
|
regulatory
compliance and clinical research, particularly relating to our
next-generation stent and CRM platforms and other internal development
programs, as well as others obtained through our strategic acquisitions;
and
|
|
•
|
sustaining
engineering efforts which factor customer feedback into continuous
improvement efforts for currently marketed and next generation
products.
|
7
Acquisitions
and Alliances
Since
1995, we have undertaken a strategic acquisition program to assemble the lines
of business necessary to achieve the critical mass that allows us to continue to
be a leader in the medical device industry. Our 2008 acquisitions
included the following:
|
•
|
Labcoat,
Ltd., a development-stage company that is developing a proprietary
drug-eluting stent coating technology designed to reduce the amount of
polymer and drug that comes in contact with the wall of the treated
vessel, while eliminating polymer and drug on the inner surface of the
stent where endothelial cell growth is required for healing;
and
|
|
•
|
CryoCor,
Inc., a developer and manufacturer of a disposable catheter system based
on proprietary cryoablation technology for the minimally invasive
treatment of cardiac arrhythmias.
|
We expect
that we will continue to focus selectively on strategic acquisitions and
alliances in order to provide new products and technology platforms to our
customers, including making additional investments in several of our existing
strategic relationships.
Products
Our
products are offered for sale principally by three dedicated business
groups—CRM; Cardiovascular, including our Cardiovascular, and Neurovascular
businesses; Endosurgery, including our Endoscopy and Urology/Gynecology
businesses; and Neuromodulation. Our Cardiovascular organization focuses on
products and technologies for use in interventional cardiology, cardiac rhythm
management, peripheral interventions, electrophysiology and neurovascular.
During 2008, we derived 79 percent of our net sales from our Cardiovascular
businesses (76 percent in 2007), approximately 17 percent from our
Endosurgery businesses (15 percent in 2007) and approximately three percent from
our Neuromodulation business (two percent in 2007). The remaining one percent of
our 2008 net sales (seven percent in 2007) was derived from businesses divested
in the first quarter of 2008, some from which we continue to generate net sales
as a result of post-separation transition services agreements.
The
following section describes certain of our CRM, Cardiovascular, Endosurgery and
Neuromodulation offerings:
We offer
a variety of implantable devices that monitor the heart and deliver electrical
impulses to treat cardiac rhythm abnormalities, including tachycardia
(abnormally fast heartbeats), which can put patients at risk of sudden cardiac
death and bradycardia (abnormally slow heartbeats), which impairs the ability to
live a full life. We also offer cardiac resynchronization devices that treat
heart failure by delivering electrical impulses to help the heart beat in a more
coordinated fashion. A key component of many of our implantable device systems
is our remote LATITUDE® Patient Management System, which provides clinicians
with information about a patient’s device and clinical status non-invasively via
the Internet, allowing for more frequent monitoring in order to guide treatment
decisions.
In 2008,
we launched several new CRM products, including the following:
ICD and
CRT-D Systems
In 2008,
we launched our first Boston Scientific-branded ICD and CRT-D devices, the
CONFIENT® ICD and LIVIAN® CRT-D product lines, in the U.S. We also launched our
COGNIS® CRT-D and TELIGEN® ICD products, which are small, thin high energy
devices, in the U.S., EMEA and certain Inter-Continental countries. These
full-featured pulse generators are based on a new common platform that offers
clinicians innovative options for customizing therapy to address the needs of
individual patients. We received regulatory approval in January 2009 to launch
our CONFIENT®
ICD in Japan and expect to launch our
8
COGNIS®
and TELIGEN® devices in Japan in 2009, subject to regulatory
approval.
In May
2008, our global launch of the ACUITY™ Spiral lead, a left ventricular lead,
added to our left ventricular leads portfolio enabling us to offer physicians
greater fixation options for delivering cardiac resynchronization therapy to
patients with various venous anatomies.
Pacemaker Systems
In May
2008, we launched our first new pacemaker system globally under the Boston
Scientific brand, the ALTRUA™ pacing system. The minute ventilation sensor in
these pacemakers allows restoration of chronotropic competence to patients who
lack the ability to moderate their heart rates appropriately in response to
physiologic stress. We expect to launch our ALTRUA™ pacing system in
Japan in 2009, subject to regulatory approval.
Remote Patient Monitoring System
To
support our ICD and CRT-D product lines, we launched two new enhancements to our
LATITUDE® remote patient monitoring system in the U.S. These enhancements
include an improved LATITUDE® web site and a smaller in-home communicator
featuring touch-screen technology. We plan to begin introducing our LATITUDE®
system in our EMEA region in 2009, subject to regulatory approval.
Electrophysiology
We offer
medical devices for the diagnosis and treatment of cardiac arrhythmias. Included
in our product offerings are RF generators, intracardiac ultrasound and
steerable ablation catheters, and diagnostic catheters. Our leading
brands include the Blazer™ cardiac ablation catheter, the Chilli II®™ cooled
ablation catheter and the MAESTRO 3000® Cardiac Ablation System. Our
electrophysiology products are distributed globally.
Interventional
Cardiology
Drug-Eluting
Stent Systems
We are
the market leader in the worldwide drug-eluting stent market. We market our
second-generation coronary stent, the TAXUS® Liberté® stent system; as well
as the PROMUS® everolimus-eluting coronary stent system, supplied to us by
Abbott, in our EMEA and Inter-Continental markets, and, in 2008, launched both
products in the U.S. market, expanding our drug-eluting stent portfolio to
include two distinct drug platforms. As of the closing of Abbott’s acquisition
of Guidant’s vascular intervention and endovascular solutions businesses, we
obtained a perpetual license to use the intellectual property used in Guidant’s
drug-eluting stent system program purchased by Abbott. In 2008, we also
initiated the U.S. launch of our TAXUS® Express²® Atom™ paclitaxel-eluting
coronary stent system, a highly deliverable drug-eluting stent designed for
treating small coronary vessels.
We expect
to launch our TAXUS® Liberté® stent system in Japan in the first quarter of
2009. We plan to launch the PROMUS® everolimus-eluting coronary stent system in
Japan in the second half of 2009, subject to regulatory approval. We are also
incurring incremental costs and expending incremental resources in order to
develop and commercialize additional products utilizing everolimus-eluting stent
technology and to support an internally developed and manufactured
next-generation everolimus-eluting stent system. We expect to launch an
internally developed and manufactured next-generation everolimus-based stent
system,
9
the
PROMUS® Element™ stent system, in our EMEA region, as well as certain
Inter-Continental countries, in late 2009 and in the U.S. and Japan in mid-2012.
In addition, we are conducting clinical trials for our third-generation
paclitaxel-eluting stent, the TAXUS® Element™ platinum chromium coronary stent
system, which we expect to launch in EMEA and certain Inter-Continental
countries during the fourth quarter of 2009, and in the U.S. and Japan in
mid-2011.
Bare-Metal
Stent Systems
We offer
our Liberté® bare-metal coronary stent system globally. The Liberté® coronary
stent system serves as the platform for our second-generation paclitaxel-eluting
stent system, the TAXUS® Liberté® coronary stent system. The Liberté® bare-metal
coronary stent system is designed to enhance deliverability and conformability,
particularly in challenging lesions. We are also developing a bare-metal version
of the TAXUS® Element coronary stent system.
Coronary
Revascularization
We market
a broad line of products used to treat patients with atherosclerosis.
Atherosclerosis, a principal cause of coronary artery obstructive disease, is
characterized by a thickening of the walls of the coronary arteries and a
narrowing of arterial lumens (openings) caused by the progressive development of
deposits of plaque. The majority of our products in this market are used in
percutaneous transluminal coronary angioplasty (PTCA) procedures and include
bare-metal and drug-eluting stent systems; PTCA balloon catheters, such as the
Maverick® balloon catheter; the Cutting Balloon® microsurgical dilatation
device; rotational atherectomy systems; guide wires; guide catheters and
diagnostic catheters.
Intraluminal
Ultrasound Imaging
We market
a family of intraluminal catheter-directed ultrasound imaging catheters and
systems for use in coronary arteries and heart chambers as well as certain
peripheral vessels. The iLab® Ultrasound Imaging System, available in
the U.S., Japan and other international markets, continues as our flagship
console and is compatible with our full line of imaging catheters. This
system enhances the diagnosis and treatment of blocked vessels and heart
disorders.
Peripheral
Interventions
We sell
various products designed to treat patients with peripheral disease (disease
which appears in blood vessels other than in the heart and in the biliary
tree), including a broad line of medical devices used in percutaneous
transluminal angioplasty and peripheral vascular stenting. Our peripheral
product offerings include vascular access products, balloon catheters, stents
and peripheral vascular catheters, wires and accessories. In 2009, we will begin
integrating certain products used for peripheral embolization procedures into
our Peripheral Interventions business. We also sell products designed to treat
patients with non-vascular disease (disease which appears outside the blood
system). Our non-vascular suite of products includes biliary stents,
drainage catheters, biopsy devices and micro-puncture sets, designed to treat,
diagnose and palliate various forms of benign and malignant tumors. We market
the PolarCath™ peripheral dilatation system used in CryoPlasty® Therapy, an
innovative approach to the treatment of peripheral artery disease in the lower
extremities. In December 2008, we received FDA approval for our
Express® SD Renal Monorail® premounted stent system for use as an adjunct to
percutaneous transluminal renal angioplasty in certain lesions of the renal
arteries. In October 2008, we received FDA approval for our Carotid WALLSTENT®
Monorail® Endoprosthesis for the treatment of patients with carotid artery
disease who are at high risk for surgery.
Neurovascular
Intervention
We market
a broad line of detachable coils (coated and uncoated),
micro-delivery stents, micro-guidewires, micro-catheters, guiding catheters and
embolics to neuro-interventional radiologists and neurosurgeons to
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treat
diseases of the neurovascular system. We market the GDC® Coils (Guglielmi
Detachable Coil) and Matrix® systems to treat brain aneurysms. We
plan to launch a next-generation family of detachable coils, including an
enhanced delivery system, in the U.S. in the second half of 2009. We also offer
the NeuroForm® stent for the treatment of wide neck aneurysms and the Wingspan®
Stent System with Gateway® PTA Balloon Catheter, each under a Humanitarian
Device Exemption approval granted by the FDA. The Wingspan Stent System is
designed to treat atherosclerotic lesions or accumulated plaque in brain
arteries. Designed for the brain’s fragile vessels, the Wingspan Stent System is
a self-expanding, nitinol stent sheathed in a delivery system that enables it to
reach and open narrowed arteries in the brain. The Wingspan Stent System is
currently the only device available in the U.S. for the treatment of
intracranial atherosclerotic disease (ICAD) and is indicated for improving
cerebral artery lumen diameter in patients with ICAD who are unresponsive to
medical therapy.
Embolic
Protection
Our
FilterWire EZ™ Embolic Protection System is a low profile filter designed to
capture embolic material that may become dislodged during a procedure, which
could otherwise travel into the microvasculature where it could cause a heart
attack or stroke. It is commercially available in the U.S., EMEA and
certain Inter-Continental countries for multiple indications, including the
treatment of disease in peripheral, coronary and carotid vessels. It is also
available in the U.S. for the treatment of saphenous vein grafts and carotid
artery stenting procedures.
Endosurgery
Esophageal,
Gastric and Duodenal (Small Intestine) Intervention
We market
a broad range of products to diagnose, treat and palliate a variety of
gastrointestinal diseases and conditions, including those affecting the
esophagus, stomach and colon. Common disease states include esophagitis, portal
hypertension, peptic ulcers and esophageal cancer. Our product offerings in this
area include disposable single and multiple biopsy forceps, balloon dilatation
catheters, hemostasis catheters and enteral feeding devices. We also market
a family of esophageal stents designed to offer improved dilatation force and
greater resistance to tumor in-growth. We offer the Radial Jaw® 4 Single-Use
Biopsy Forceps, which are designed to enable collection of large high-quality
tissue specimens without the need to use large channel therapeutic
endoscopes.
Colorectal
Intervention
We market
a line of hemostatic catheters, polypectomy snares, biopsy forceps, enteral
stents and dilatation catheters for the diagnosis and treatment of polyps,
inflammatory bowel disease, diverticulitis and colon cancer.
Pancreatico-Biliary
Intervention
We sell a
variety of products to diagnose, treat and palliate benign and malignant
strictures of the pancreatico-biliary system (the gall bladder, common bile
duct, hepatic duct, pancreatic duct and the pancreas) and to remove stones found
in the common bile duct. Our product offerings include diagnostic catheters used
with contrast media, balloon dilatation catheters and sphincterotomes. We also
market self-expanding metal and temporary biliary stents for palliation and
drainage of the common bile duct. In addition, we market the Spyglass® Direct
Visualization System for direct imaging of the bile duct system. The Spyglass
system is the first single-operator cholangioscopy device that offers
clinicians a direct visualization of the bile duct system and includes
supporting devices for tissue acquisition, stone management and
lithotripsy.
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Pulmonary
Intervention
We market
devices to diagnose, treat and palliate diseases of the pulmonary system. Our
product offerings include pulmonary biopsy forceps, transbronchial aspiration
needles, cytology brushes and tracheobronchial stents used to dilate strictures
or for tumor management.
Urinary
Tract Intervention and Bladder Disease
We sell a
variety of products designed primarily to treat patients with urinary stone
disease, including: ureteral dilatation balloons used to dilate strictures or
openings for scope access; stone baskets used to manipulate or remove stones;
intracorporeal shock wave lithotripsy devices and holmium laser systems used to
disintegrate stones; ureteral stents implanted temporarily in the urinary tract
to provide short-term or long-term drainage; and a wide variety of guidewires
used to gain access to specific sites. We have also developed other devices to
aid in the diagnosis and treatment of bladder cancer and bladder
obstruction.
Prostate
Intervention
We market
electro-surgical resection devices designed to resect large diseased tissue
sites for the treatment of benign prostatic hyperplasia (BPH). We also market
disposable needle biopsy devices, designed to take core prostate biopsy samples.
We also market the Prolieve® Thermodilatation System, a transurethral microwave
thermotherapy system for the treatment of BPH. In addition, we distribute and
market the DuoTome™ SideLite™ holmium laser treatment system for treatment of
symptoms associated with BPH.
Pelvic
Floor Reconstruction and Urinary Incontinence
We market
a line of less-invasive devices to treat female pelvic floor
conditions in the areas of stress urinary incontinence and pelvic
organ prolapse. These devices include a full line of mid-urethral
sling products, sling materials, graft materials, pelvic floor reconstruction
kits, suturing devices and injectables. We have exclusive U.S. distribution
rights to the Coaptite® Injectable Implant, a next-generation bulking agent, for
the treatment of stress urinary
incontinence.
Gynecology
We also
market other products in the area of women’s health. Our Hydro
ThermAblator® System offers a less-invasive technology for the treatment of
excessive uterine bleeding by ablating the lining of the uterus, the tissue
responsible for menstrual bleeding.
Neuromodulation
We market
the Precision® Spinal Cord Stimulation (SCS) system for the treatment of chronic
pain of the lower back and legs. This system delivers advanced pain management
by applying a small electrical signal to mask pain signals traveling from the
spinal cord to the brain. The Precision System utilizes a rechargeable battery
and features a patient-directed fitting system for fast and effective
programming. The Precision System is also being assessed for use in
treating other sources of peripheral pain.
Marketing
and Sales
A
dedicated sales force of approximately 2,300 individuals in approximately 40
countries internationally, and over 3,200 individuals in the U.S. marketed our
products worldwide as of December 31, 2008. The majority of our net sales
are derived from countries in which we have direct sales organizations. A
network of distributors and dealers who offer our products worldwide accounts
for our remaining sales. We will continue to leverage our infrastructure in
markets where commercially appropriate and use third parties in those markets
where it is not economical or strategic to establish or maintain a direct
presence. We also have
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a
dedicated corporate sales organization in the U.S. focused principally on
selling to major buying groups and integrated healthcare networks.
In 2008,
we sold our products to over 10,000 hospitals, clinics, outpatient facilities
and medical offices. We are not dependent on any single institution and no
single institution accounted for more than ten percent of our net sales in
2008. However, large group purchasing organizations, hospital networks and
other buying groups have become increasingly important to our business and
represent a substantial portion of our U.S. net sales.
Certain
products are manufactured for us by third parties, such as the PROMUS®
everolimus-eluting coronary stent system, introducer sheaths and certain
guidewires, and pneumatic and laser lithotripters. Employing our sales and
marketing strength, we expect to continue to seek new opportunities for
distributing complementary products as well as new technologies.
International
Operations
In the
first quarter of 2008, we began operating through two international business
units: EMEA, consisting of Europe, Middle East and Africa; and
Inter-Continental, consisting of Japan, Asia Pacific, Canada and Latin America.
This reorganization is designed to allow for better leverage of infrastructure
and resources, as well as restored competitiveness. Maintaining and expanding
our international presence is an important component of our long-term growth
plan. Through our international presence, we seek to increase net sales and market share, leverage our
relationships with leading physicians and their clinical research programs,
accelerate the time to bring new products to market, and gain access to
worldwide technological developments that we can implement across our product
lines. After our acquisition of Guidant, we integrated Guidant’s international
sales operations into our geographic regions. We have moved from a distributor
model to a direct sales force, utilizing a dealer network, for our CRM
products in Japan, which has negatively impacted our net sales and market share
there and may continue to do so until we fully implement this
model.
International
net sales accounted for approximately 43 percent of our net sales in 2008.
Net sales and operating income attributable to our 2008 geographic regions are
presented in
Note P—Segment Reporting to our
2008 consolidated financial statements included in Item 8 of this Annual
Report.
We have
five international manufacturing facilities in Ireland, two in Costa Rica and
one in Puerto Rico. Approximately 32 percent of our products sold worldwide are
manufactured at these facilities. Additionally, we maintain international
research and development capabilities in Ireland, and Miyazaki, Japan, as well
as physician training centers in Paris, France and Tokyo, Japan. In
connection with certain of our restructuring initiatives, we intend to close two
of our manufacturing plants in Ireland.
Manufacturing
and Raw Materials
We are
focused on continuously improving our supply chain effectiveness, strengthening
our manufacturing processes and increasing operational efficiencies within our
organization. By shifting global manufacturing along product lines, we are able
to leverage our existing resources and concentrate on new product development,
including the enhancement of existing products, and their commercial launch. We
are implementing new systems designed to provide improved quality and
reliability, service, greater efficiency and lower supply chain costs. We have
substantially increased our focus on process controls and validations,
13
supplier
controls, distribution controls and providing our operations teams with the
training and tools necessary to drive continuous improvement in product quality.
In 2008, we continued to focus on examining our operations and general business
activities to identify cost-improvement opportunities in order to enhance our
operational effectiveness. In early 2009, we announced our Plant Network
Optimization plan as a complement to our previously initiated expense and
head count reductions. The plan calls for reducing the number of
our manufacturing plants from 17 to 12 over the next three years and relocating
approximately 15 percent of our current value of production to different
facilities.
We design
and manufacture the majority of our products in technology centers around the
world. Many components used in the manufacture of our products are readily
fabricated from commonly available raw materials or off-the-shelf items
available from multiple supply sources. Certain items are custom made to meet
our specifications. We believe that in most cases, redundant capacity exists at
our suppliers and that alternative sources of supply are available or could be
developed within a reasonable period of time. We also have an on-going program
to identify single-source components and to develop alternative back-up
supplies. However, in certain cases, we may not be able to quickly establish additional or replacement suppliers for
specific components or materials, largely due to the regulatory approval system
and the complex nature of our manufacturing processes and those of our
suppliers. A reduction or interruption in supply, an inability to develop and
validate alternative sources if required, or a significant increase in the price
of raw materials or components could adversely affect our operations and
financial condition, particularly materials or components related to our TAXUS®
drug-eluting stent system and our CRM products. In addition, our products
require sterilization prior to sale and we rely primarily on third party
vendors to perform this service. To the extent our third
party sterilizers are unable to process our
products, whether due to raw material, capacity, regulatory or
other constraints, we may be unable to transition to other
providers in a timely manner, which could have an adverse impact on our
operations.
We are
reliant on Abbott for our supply of PROMUS® stent systems. Any production or
capacity issues that affect Abbott’s manufacturing capabilities or the process
for forecasting, ordering and receiving shipments may impact our ability to
increase or decrease the level of supply to us in a timely manner; therefore,
our supply of PROMUS® stent systems may not align with customer demand, which
could have an adverse effect on our operating results. At present, we
believe that our supply of PROMUS® stent systems from Abbott is sufficient to
meet customer demand. Our supply agreement with Abbott for PROMUS® stent
systems extends through the middle of the fourth quarter of 2009 in Europe, and
is currently being reviewed by the European Commission for possible extension,
and through the end of the second quarter of 2012 in the U.S. and Japan. We
expect to launch an internally developed and manufactured next-generation
everolimus-eluting stent system, the PROMUS® Element™ stent system, in
our EMEA region and certain Inter-Continental countries in late 2009 and in the
U.S. and Japan in mid-2012.
Under the
terms of our supply arrangement with Abbott, the gross profit and operating
profit margin of a PROMUS® stent system is significantly lower than that of our
TAXUS® stent system. Therefore, if sales of our PROMUS® stent system
continue to increase in relation to our total drug-eluting stent system sales,
our profit margins will continue to decrease. Further, the price we
pay Abbott for our supply of PROMUS® stent systems is determined by our
contracts with them. Our cost is based, in part, on previously fixed
estimates of Abbott’s manufacturing costs for PROMUS® stent systems and
third-party reports of our average selling price of PROMUS® stent systems.
Amounts paid pursuant to this pricing arrangement are subject to a retroactive
adjustment at pre-determined intervals based on Abbott’s actual costs to
manufacture these stent systems for us and our average selling price of PROMUS®
stent systems. During 2009, we may make a payment to or receive a payment from
Abbott based on the differences between their actual manufacturing costs and the
contractually stipulated manufacturing costs and differences between our actual
average selling price and third-party reports of our average selling price, in
each case, with respect to our purchases of PROMUS® stent systems from Abbott
during 2008, 2007 and 2006. As a result, during 2009, our profit margins on the
PROMUS® stent system may increase or decrease.
Quality
Assurance
In
January 2006, legacy Boston Scientific received a corporate warning letter from
the FDA notifying us of serious regulatory problems at three of our facilities
and advising us that our corporate-wide corrective action plan relating to three
site-specific warning letters issued to us in 2005 was inadequate. We have
identified solutions to the quality system issues cited by the FDA and have made
significant progress in transitioning our organization to implement those
solutions. We implemented and continue to use the Quality Master Plan to drive
continuous improvement in compliance and quality performance. In addition, the
Compliance and Quality Committee of our Board of Directors monitors our
compliance and quality initiatives. During 2008, the FDA reinspected a number of
our facilities and, in October 2008, informed us that our quality system is now
in substantial compliance with its Quality System Regulations. The FDA has
approved all of our requests for final approval of Class III product submissions
previously on hold due to the corporate warning letter and has approved all
currently eligible requests for Certificates to Foreign Governments (CFGs). The
corporate warning letter remains in place pending final remediation of certain
Medical Device Report (MDR) filing issues, which we are actively working with
the FDA to resolve.
We are
committed to providing high quality products to our customers. To meet this
commitment, we have
14
implemented
updated quality systems and concepts throughout our organization. Our quality
policy, applicable to all employees, is “I improve the quality of patient care
and all things Boston Scientific.” This personal commitment connects our people
with the vision and mission of Boston Scientific. Our quality system
starts with the initial product specification and continues through the design
of the product, component specification process and the manufacturing, sales and
servicing of the product. Our quality system is intended to build in quality and
process control and to utilize continuous improvement concepts throughout the
product life. These systems are designed to enable us to satisfy the various
international quality system regulations, including those of the FDA with
respect to products sold in the U.S. All of our manufacturing
facilities, including our U.S. and European distribution centers, are
certified under the ISO 13485:2003 quality system standard for medical devices,
which requires, among other items, an implemented quality system that applies to
component quality, supplier control, product design and manufacturing
operations. This certification can be obtained only after a complete audit of a
company’s quality system by an independent outside auditor. Maintenance of the
certification requires that these facilities undergo periodic
re-examination.
We
maintain an on-going initiative to seek ISO 14001 certification at our plants
around the world. ISO 14001, the environmental management system standard in the
ISO 14000 series, provides a voluntary framework to identify key environmental
aspects associated with our businesses. We engage in continuous environmental
performance improvement around these aspects. At present, ten of our
manufacturing and distribution facilities have attained ISO 14001 certification.
We expect to continue this initiative until each of our manufacturing
facilities, including those we acquire, becomes certified.
Competition
We
encounter significant competition across our product lines and in each market in
which we sell our products from various companies, some of which may have
greater financial and marketing resources than we do. Our primary competitors
have historically included Johnson & Johnson (including its subsidiary,
Cordis Corporation) and Medtronic, Inc. (including its subsidiary,
Medtronic AVE, Inc.), as well as a wide range of companies that sell a
single or limited number of competitive products or participate in only a
specific market segment. Since we acquired Guidant, Abbott has become a primary
competitor of ours in the interventional cardiology market and we now compete
with St. Jude Medical, Inc. in the CRM and neuromodulation markets. We also
face competition from non-medical device companies, such as pharmaceutical
companies, which may offer alternative therapies for disease states intended to
be treated using our products.
We
believe that our products compete primarily on their ability to safely and
effectively perform diagnostic and therapeutic procedures in a less-invasive
manner, including ease of use, reliability and physician familiarity. In the
current environment of managed care, economically-motivated buyers,
consolidation among healthcare providers, increased competition and declining
reimbursement rates, we have been increasingly required to compete on the basis
of price, value, clinical outcomes, reliability and efficiency. We believe
the current global economic conditions could put additional competitive pressure
on us, including on our average selling prices, overall procedure rates and
market sizes. We believe that our continued competitive success will depend upon
our ability to create or acquire scientifically advanced technology, apply our
technology cost-effectively and with superior quality across product lines and
markets, develop or acquire proprietary products, attract and retain skilled
development personnel, obtain patent or other protection for our products,
obtain required regulatory and reimbursement approvals, continually enhance
our quality systems, manufacture and successfully market our products
either directly or through outside parties and supply sufficient inventory to
meet customer demand.
Regulatory
Environment
The
medical devices that we manufacture and market are subject to regulation by
numerous regulatory bodies, including the FDA and comparable international
regulatory agencies. These agencies require manufacturers of medical devices to
comply with applicable laws and regulations governing the
15
development,
testing, manufacturing, labeling, marketing and distribution of medical devices.
Devices are generally subject to varying levels of regulatory control, the most
comprehensive of which requires that a clinical evaluation program be conducted
before a device receives approval for commercial distribution.
In the
U.S., permission to distribute a new device generally can be met in one of three
ways. The first process requires that a pre-market notification (510(k)
Submission) be made to the FDA to demonstrate that the device is as safe and
effective as, or substantially equivalent to, a legally marketed device that is
not subject to pre-market approval (PMA), i.e.,
the “predicate” device. An appropriate predicate device for a pre-market
notification is one that (i) was legally marketed prior to May 28,
1976, (ii) was approved under a PMA but then subsequently reclassified from
class III to class II or I, or (iii) has been found to be
substantially equivalent and cleared for commercial distribution under a 510(k)
Submission. Applicants must submit descriptive data and, when necessary,
performance data to establish that the device is substantially equivalent to a
predicate device. In some instances, data from human clinical trials must also
be submitted in support of a 510(k) Submission. If so, these data must be
collected in a manner that conforms to the applicable Investigational Device
Exemption (IDE) regulations. The FDA must issue an order finding substantial
equivalence before commercial distribution can occur. Changes to existing
devices covered by a 510(k) Submission that do not raise new questions of safety
or effectiveness can generally be made without additional 510(k) Submissions.
More significant changes, such as new designs or materials, may require a
separate 510(k) with data to support that the modified device remains
substantially equivalent.
The
second process requires the submission of an application for PMA to the FDA to
demonstrate that the device is safe and effective for its intended use as
manufactured. This approval process applies to certain class III devices.
In this case, two steps of FDA approval are generally required before marketing
in the U.S. can begin. First, we must comply with the applicable IDE regulations
in connection with any human clinical investigation of the device in the U.S.
Second, the FDA must review our PMA application, which contains, among other
things, clinical information acquired under the IDE. The FDA will approve the
PMA application if it finds that there is a reasonable assurance that the device
is safe and effective for its intended purpose.
The third
process requires that an application for a Humanitarian Device Exemption
(HDE) be made to the FDA for the use of a Humanitarian Use Device (HUD). A
HUD is intended to benefit patients by treating or diagnosing a disease or
condition that affects, or is manifested in, fewer than 4,000 individuals in the
U.S. per year. The application submitted to the FDA for an HDE is similar in
both form and content to a PMA application, but is exempt from the effectiveness
requirements of a PMA. This approval process demonstrates there is no
comparable device available to treat or diagnose the condition, the device will
not expose patients to unreasonable or significant risk, and the benefits to
health from use outweigh the risks. The HUD provision of the regulation provides
an incentive for the development of devices for use in the treatment or
diagnosis of diseases affecting small patient populations.
The FDA
can ban certain medical devices; detain or seize adulterated or misbranded
medical devices; order repair, replacement or refund of these devices; and
require notification of health professionals and others with regard to medical
devices that present unreasonable risks of substantial harm to the public
health. The FDA may also enjoin and restrain certain violations of the Food,
Drug and Cosmetic Act and the Safe Medical Devices Act pertaining to medical
devices, or initiate action for criminal prosecution of such violations.
International sales of medical devices manufactured in the U.S. that are not
approved by the FDA for use in the U.S., or are banned or deviate from lawful
performance standards, are subject to FDA export requirements. Exported devices
are subject to the regulatory requirements of each country to which the device
is exported. Some countries do not have medical device regulations, but in most
foreign countries, medical devices are regulated. Frequently, regulatory
approval may first be obtained in a foreign country prior to application in the
U.S. to take advantage of differing regulatory requirements. Most countries
outside of the U.S. require that product approvals be recertified on a regular
basis, generally every five years. The recertification process requires that we
evaluate any device changes and any new regulations or standards relevant to the
device and conduct appropriate testing to document continued compliance. Where
recertification applications are required, they must be approved in order to
continue selling our products in those countries.
16
In the
European Union, we are required to comply with the Medical Devices Directive and
obtain CE Mark certification in order to market medical devices. The CE Mark
certification, granted following approval from an independent notified body, is
an international symbol of adherence to quality assurance standards and
compliance with applicable European Medical Devices Directives. We are also
required to comply with other foreign regulations such as the requirement that
we obtain Ministry of Health, Labor and Welfare approval before we can launch
new products in Japan. The time required to obtain these foreign approvals to
market our products may vary from U.S. approvals, and requirements for these
approvals may differ from those required by the FDA.
We are
also subject to various environmental laws, directives and regulations both in
the U.S. and abroad. Our operations, like those of other medical device
companies, involve the use of substances regulated under environmental laws,
primarily in manufacturing and sterilization processes. We believe that
compliance with environmental laws will not have a material impact on our
capital expenditures, earnings or competitive position. Given the scope and
nature of these laws, however, there can be no assurance that environmental laws
will not have a material impact on our results of operations. We assess
potential environmental contingent liabilities on a quarterly basis. At present,
we are not aware of any such liabilities that would have a material impact on
our business. We are also certified with respect to the enhanced environmental
FTSE4Good criteria and are a constituent member of the London Stock Exchange’s
FTSE4Good Index, which recognizes companies that meet certain corporate
responsibility standards. In 2008, we were recognized for environmental
stewardship, winning a Leadership in Energy and Environmental Design (LEED)
award for the renovation of our research and development facility in
Marlborough, Massachusetts.
We are
members of the U.S. Climate Action Partnership (USCAP). USCAP is a
diverse group of 27 major businesses and six environmental non-governmental
organizations with a commitment to work with Congress and the President to
rapidly enact legislation that would significantly slow, stop and reverse the
growth of greenhouse gas emissions.
Government
Affairs
We
maintain a global Government Affairs presence in Washington D.C. to
actively monitor and influence a myriad of legislative and administrative
policies impacting us, both on a domestic and an international basis. The
Government Affairs office works closely with members of Congress, key
Congressional committee staff and White House and Administration staff, which
facilitates our active engagement on issues affecting our business. Our
proactive approach and depth of political and policy expertise are aimed at
having our positions heard by federal, state and global decision-makers, while
also advancing our business objectives by educating policymakers on our
positions, key priorities and the value of our technologies.
The
Government Affairs office also manages the Company’s political action committee
and works closely with trade groups on issues affecting our industry and
healthcare generally.
Community
Outreach
We have
developed a program to assist to “close the gap“ in
addressing disparities in cardiovascular care for women, black Americans, and
Hispanic/Latino Americans. In 2006, a team of physicians and health
care professionals from across the United States came together to look at ways
to address these disparities by creating a “Proof of Principle” pilot in ten
test market cities. The committee facilitated the development of educational
tools and community events, to help healthcare professionals improve outcomes
for specific underserved patient populations.
We
believe that healthcare professionals can provide enhanced service, and ensure
better communications with patients when they are skilled in engaging women and
other minority patients. This is especially
17
important
as these underserved patient populations continue to grow.
Third-Party
Coverage and Reimbursement
Our
products are purchased principally by hospitals, physicians and other healthcare
providers around the world that typically bill various third-party payors,
including governmental programs (e.g., Medicare and Medicaid), private insurance
plans and managed care programs, for the healthcare services provided to their
patients. Third-party payors may provide or deny coverage for certain
technologies and associated procedures based on independently determined
assessment criteria. Reimbursement by third-party payors for these services is
based on a wide range of methodologies that may reflect the services’ assessed
resource costs, clinical outcomes and economic value. These reimbursement
methodologies confer different, and sometimes conflicting, levels of financial
risk and incentives to healthcare providers and patients, and these
methodologies are subject to frequent refinements. Third-party payors are also
increasingly adjusting reimbursement rates and challenging the prices charged
for medical products and services. There can be no assurance that our products
will be covered automatically by third-party payors, that reimbursement will be
available or, if available, that the third-party payors’ coverage policies will
not adversely affect our ability to sell our products profitably.
Initiatives
to limit the growth of healthcare costs, including price regulation, are also
underway in many countries in which we do business including the U.S. under the
new administration. Implementation of cost containment initiatives and
healthcare reforms in significant markets such as the U.S., Japan, Europe and
other international markets may limit the price of, or the level at which
reimbursement is provided for, our products and may influence a physician’s
selection of products used to treat patients. Spending on health care in some
countries, including the U.S., may also be affected by the global economic
slowdown.
Proprietary
Rights and Patent Litigation
We rely
on a combination of patents, trademarks, trade secrets and non-disclosure
agreements to protect our intellectual property. We generally file patent
applications in the U.S. and foreign countries where patent protection for our
technology is appropriate and available. At December 31, 2008, we held
approximately 6,500 U.S. patents, many of which have foreign counterparts, and
had more than 10,000 patent applications pending worldwide that cover various
aspects of our technology. In addition, we hold exclusive and non-exclusive
licenses to a variety of third-party technologies covered by patents and patent
applications. There can be no assurance that pending patent applications will
result in the issuance of patents, that patents issued to or licensed by us will
not be challenged or circumvented by competitors, or that these patents will be
found to be valid or sufficiently broad to protect our technology or to provide
us with a competitive advantage.
We rely
on non-disclosure and non-competition agreements with employees, consultants and
other parties to protect, in part, trade secrets and other proprietary
technology. There can be no assurance that these agreements will not be
breached, that we will have adequate remedies for any breach, that others will
not independently develop equivalent proprietary information or that third
parties will not otherwise gain access to our trade secrets and proprietary
knowledge.
There has
been substantial litigation regarding patent and other intellectual property
rights in the medical device industry, particularly in the areas in which
we compete. We have defended, and will continue to defend, ourself against
claims and legal actions alleging infringement of the patent rights of others.
Adverse determinations in any patent litigation could subject us to significant
liabilities to third parties, require us to seek licenses from third parties,
and, if licenses are not available, prevent us from manufacturing, selling or
using certain of our products, which could have a material adverse effect on our
business. Additionally, we may find it necessary to initiate litigation to
enforce our patent rights, to protect our trade secrets or know-how and to
determine the scope and validity of the proprietary rights of others. Patent
litigation can be costly
18
and
time-consuming, and there can be no assurance that our litigation expenses will
not be significant in the future or that the outcome of litigation will be
favorable to us. Accordingly, we may seek to settle some or all of our pending
litigation. Settlement may include cross licensing of the patents that are the
subject of the litigation as well as our other intellectual property and may
involve monetary payments to or from third parties.
See Item 3. Legal Proceedings
and Note L—Commitments and
Contingencies to our 2008 consolidated financial statements included in
Item 8 of this Annual Report for a further discussion of patent and other
litigation and proceedings in which we are involved. In management’s opinion, we
are not currently involved in any legal proceeding other than those specifically
identified in Note L,
which, individually or in the aggregate, could have a material effect on our
financial condition, results of operations and liquidity.
Risk
Management
The
testing, marketing and sale of human healthcare products entails an inherent
risk of product liability claims. In the normal course of business, product
liability and securities claims are asserted against us. Product liability and
securities claims may be asserted against us in the future related to events
unknown at the present time. We are substantially self-insured with respect to
product liability claims. We maintain insurance policies providing limited
coverage against securities claims. 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 outcome, could have
a material adverse effect on our business. We believe that our risk management
practices, including limited insurance coverage, are reasonably adequate to
protect against anticipated product liability and securities litigation losses.
However, unanticipated catastrophic losses could have a material adverse impact
on our financial position, results of operations and liquidity.
Employees
As of
December 31, 2008, we had approximately 24,800 employees, including
approximately 12,700 in operations; 1,800 in administration; 4,200 in clinical,
regulatory and research and development; 5,500 in selling and marketing;
and 600 in distribution. Of these employees, we employed approximately 8,900
outside the U.S., approximately 5,600 of whom are in the manufacturing
operations function. We believe that the continued success of our business will
depend, in part, on our ability to attract and retain qualified personnel. In
October 2007, we committed to an expense and head count reduction plan,
which resulted in the elimination of approximately 2,300 positions
worldwide. We also eliminated 2,000 positions in connection with
divestiture of our non-strategic businesses, which were completed in early
2008. We added 500 positions during 2008, primarily in direct
sales-related positions. In early 2009, we announced our Plant
Network Optimization plan, aimed at simplifying our plant network, reducing our
manufacturing costs and improving gross margins, which we estimate will result
in the reduction of approximately 300 positions by the end of 2011.
Seasonality
Our
worldwide sales do not reflect any significant degree of seasonality; however,
customer purchases have been lighter in the third quarter of prior years than in
other quarters. This reflects, among other factors, lower demand during summer
months, particularly in European countries.
Available
Information
Copies of
our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and
19
amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 are available free of charge on our website
(www.bostonscientific.com) as soon as reasonably practicable after we
electronically file the material with or furnish it to the SEC. Our Corporate
Governance Guidelines and Code of Conduct, which applies to all of our
directors, officers and employees, including our Board of Directors, Chief
Executive Officer, Chief Financial Officer, Chief Accounting Officer and
Corporate Controller, are also available on our website, along with any
amendments to those documents. Any amendments to or waivers for executive
officers or directors of our Code of Conduct will be disclosed on our website
promptly after the date of any such amendment or waiver. Printed copies of these
posted materials are also available free of charge to shareholders who request
them in writing from Investor Relations, One Boston Scientific Place, Natick, MA
01760-1537. Information on our website or connected to our website is not
incorporated by reference into this Annual Report.
Safe Harbor for
Forward-Looking Statements
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” within the meaning of Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements may be identified by
words like “anticipate,” “expect,” “project,” “believe,” “plan,” “estimate,”
“intend” and similar words and include, among other things, statements regarding
our financial performance; our growth strategy; the effectiveness of our
restructuring, expense, head count reduction and plant network optimization
initiatives; timing of regulatory approvals and plant certifications; our
regulatory and quality compliance; expected research and development efforts;
product development and iterations; new product launches and launches of our
existing products in new geographies; our market position in the marketplace for
our products and our sales and marketing strategy; the effect of new accounting
pronouncements; the outcome of matters before taxing authorities; intellectual
property and litigation matters; our ability to finance our capital needs
and expenditures; the ability of our suppliers and third-party sterilizers to
meet our requirements; our ability to meet the financial covenants required by
our term loan and revolving credit facility, or to renegotiate the terms of or
obtain waivers for compliance with those covenants; and our strategy regarding
acquisitions, divestitures and strategic investments, as well as integration
execution. These forward-looking statements are based on our beliefs,
assumptions and estimates using information available to us at this 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.
Except as
required by law, we do not intend to update any 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, which are based on
certain risks and uncertainties, including the risk factors described in Item 1A
under the heading “Risk Factors.” Factors that could cause actual results to
differ materially from those expressed in forward-looking statements are
contained below and in the risk factors described in Item 1A under the heading
“Risk Factors.”
CRM
|
•
|
Our
estimates for the worldwide CRM market, the increase in the size of the
CRM market above existing levels and our ability to increase CRM net
sales;
|
|
•
|
The
overall performance of, and referring physician, implanting physician and
patient confidence in, our and our competitors’ CRM products and
technologies, including our COGNIS® CRT-D and TELIGEN® ICD systems and our
LATITUDE® Patient Management
System;
|
20
|
•
|
The
results of CRM clinical trials undertaken by us, our competitors or other
third parties;
|
|
•
|
Our
ability to successfully launch next-generation products and technology
features, including the INGENIO™ pacemaker system;
|
|
•
|
Our
ability to grow sales of both new and replacement implant
units;
|
|
•
|
Our
ability to retain key members of 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;
|
|
•
|
Our
ability to successfully and timely implement a direct sales model for our
CRM products in Japan; 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
Stents
|
•
|
Volatility
in the coronary stent market, our estimates for the worldwide coronary
stent market, the recovery of the coronary stent market and our ability to
increase coronary stent net sales, 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 successfully launch next-generation products and technology
features;
|
|
•
|
Our
ability to maintain or expand our worldwide market positions through
reinvestment in our two drug-eluting stent
programs;
|
|
•
|
Our
ability to manage the mix of our PROMUS® stent system net sales relative
to our total drug-eluting stent net sales and to launch on-schedule a
next-generation everolimus-eluting stent system with gross profit margins
more comparable to our TAXUS® stent
system;
|
|
•
|
Our
share of the worldwide drug-eluting stent market, the 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, and the penetration rate of drug-eluting stent technology in the
U.S. and international markets;
|
|
•
|
The
overall performance of, and continued physician confidence in, our and
other drug-eluting stent systems, our ability to adequately address
concerns regarding the perceived risk of late stent thrombosis, and the
results of drug-eluting stent clinical trials undertaken by us, our
competitors or other third
parties;
|
|
•
|
Abbott’s
ability to obtain approval for its XIENCE V™ everolimus-eluting coronary
stent system in Japan and Abbott’s payment to us of the associated
milestone obligation;
|
|
•
|
Our
reliance on Abbott’s manufacturing capabilities and supply chain, and our
ability to align our PROMUS® stent system supply from Abbott with customer
demand through our forecasting and ordering
processes;
|
21
|
•
|
Enhanced
requirements to obtain regulatory approval in the U.S. and around the
world and the associated impact on new product launch schedules and the
cost of product approval and
compliance;
|
|
•
|
Our
ability to manage inventory levels, accounts receivable, gross margins and
operating expenses and to react effectively to worldwide economic and
political conditions; and
|
|
•
|
Our
ability to retain key members of our cardiology sales force and other key
personnel.
|
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 and quality systems in the U.S.
and around the world;
|
|
•
|
Our
ability to minimize or avoid future FDA warning letters or field actions
relating to our products and the on-going inherent risk of potential
physician advisories or field actions related to medical
devices;
|
|
•
|
The
effect of our litigation; risk management practices, including
self-insurance; and compliance activities on our loss contingencies, legal
provision and cash flows;
|
|
•
|
The
impact of our stockholder derivative and class action, patent, product
liability, contract and other litigation, governmental investigations and
legal proceedings;
|
|
•
|
Costs
associated with our on-going compliance and quality activities and
sustaining organizations;
|
|
•
|
The
impact of increased pressure on the availability and rate of third-party
reimbursement for our products and procedures worldwide;
and
|
|
•
|
Legislative
or regulatory efforts to modify the product approval or reimbursement
process, including a trend toward demonstrating clinical outcomes,
comparative effectiveness and cost
efficiency.
|
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 net sales
growth;
|
|
•
|
Our
ability to develop next-generation products and technologies within our
drug-eluting stent and CRM businesses, as well as our ability to develop
products and technologies successfully in our other
businesses;
|
|
•
|
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;
|
22
|
•
|
Our
failure to succeed at, or our decision to discontinue, any of our growth
initiatives;
|
|
•
|
Our
ability to integrate the strategic acquisitions we have
consummated;
|
|
•
|
Our
ability to fund with cash or common stock any acquisitions or alliances,
or to fund contingent payments associated with these
alliances;
|
|
•
|
Our
ability to prioritize our internal research and development project
portfolio and our external investment portfolio to keep expenses in line
with expected revenue levels, or our decision to sell, discontinue, write
down or reduce the funding of any of these
projects;
|
|
•
|
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 changes in reimbursement
practices and policies; and
|
|
•
|
The
potential effect of foreign currency fluctuations and interest rate
fluctuations on our net sales, expenses and resulting
margins.
|
|
|
Capital
Management
|
•
|
Our
ability to implement, fund, and achieve sustainable cost improvement
measures, including our plant network optimization plan, intended to
improve overall gross profit margins, and sustaining our other expense and
head count reduction initiatives and restructuring
program;
|
|
•
|
Our
ability to generate sufficient cash flow to fund operations, capital
expenditures, and strategic investments, as well as to effectively manage
our debt levels and covenant compliance and to minimize the impact of
interest rate fluctuations on our earnings and cash
flows;
|
|
•
|
Our
ability to access the public and private capital markets when desired and
to issue debt or equity securities on terms reasonably acceptable to
us;
|
|
•
|
Our
ability to recover substantially all of our deferred tax assets;
and
|
|
•
|
The
impact of examinations and assessments by domestic and international
taxing authorities on our tax provision, financial condition or results of
operations.
|
23
Other
|
•
|
Risks
associated with significant changes made or to be made to our
organizational structure, or to the membership of our executive committee
or Board of Directors;
|
|
•
|
Risks
associated with our acquisition of Guidant, including, among other things,
the indebtedness we have incurred and the integration challenges we will
continue to face;
|
|
•
|
Our
ability to retain our key employees and avoid business disruption and
employee distraction as we execute our expense and head count reduction
and plant network optimization initiatives;
and
|
|
•
|
Our
ability to maintain management focus on core business activities while
also concentrating on resolving the corporate warning letter and
implementing strategic initiatives, including expense and head count
reductions and our restructuring program and our plant network
optimization plan, in order to streamline our operations, reduce our debt
obligations and improve our gross
margins.
|
Several
important factors, in addition to the specific factors discussed in connection
with each forward-looking statement individually and the risk factors described
in Item 1A under the heading “Risk Factors,” 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
1A. RISK
FACTORS
In
addition to the other information contained in this Annual Report and the
exhibits hereto, the following risk factors should be considered carefully in
evaluating our business. Our business, financial condition or results of
operations could be materially adversely affected by any of these risks. This
section contains forward-looking statements. You should refer to the explanation
of the qualifications and limitations on forward-looking statements set forth at
the end of Item 1 of this Annual Report. Additional risks not presently known to
us or that we currently deem immaterial may also adversely affect our business,
financial condition or results of operations.
We
derive a significant portion of our net sales from the sale of drug-eluting
coronary stent systems and cardiac rhythm management (CRM) products in the
United States. A decline in market size, a failure of market growth rates to
return to historic levels, increased competition, supply interruption or product
launch delays may materially adversely affect our results of operations, our
financial position, including our goodwill balances, or financial
condition.
Net sales
from drug-eluting coronary stent systems represented approximately 20 percent of
our consolidated net sales during the year ended December 31, 2008. Our
U.S. TAXUS® sales declined in 2008 relative to prior years, due largely to
recent competitive launches. In addition, the U.S. market size for
drug-eluting stents has declined due to uncertainty regarding the perceived risk
of late stent thrombosis following the use of drug-eluting stents. Late stent
thrombosis is the formation of a clot, or thrombus, within the stented area one
year or more after implantation of the stent. There can be no assurance that
these concerns will be alleviated in the near term or that the size of the U.S.
drug-eluting stent market will return to previous levels. In 2007, our
24
TAXUS®
stent system and Johnson & Johnson’s CYPHER® stent system were the only two
drug-eluting stents available in the U.S. market. In 2008, Medtronic launched
its Endeavor® drug-eluting stent system and Abbott launched its XIENCE V™
everolimus-eluting stent system in the U.S.
The
manufacture of our TAXUS® coronary stent system involves the integration of
multiple technologies, critical components, raw materials and complex processes.
Significant favorable or unfavorable changes in forecasted demand, as well as
disruptions associated with our TAXUS® stent manufacturing process, may impact
our inventory levels. Variability in expected demand or the timing of the
launch of next-generation products may result in excess or expired inventory
positions and future inventory charges, which may adversely impact our results
from operations. We share with Abbott rights to everolimus-eluting stent
technology, including its XIENCE V™ everolimus-eluting stent program. As a
result of our sharing arrangements, we are reliant on Abbott’s regulatory and
clinical activities and on their continued supply of both PROMUS®
everolimus-eluting stent systems and certain components utilized in our
drug-eluting stent research and development programs. Delays in receipt of
regulatory approvals for the XIENCE V™ stent system in Japan, receipt of
insufficient quantities of the PROMUS® stent system from Abbott, changing
acceptance of these stents in the marketplace, or disruption in our supply of
components (including everolimus) for research and development could adversely
affect our results of operations, as well as our ability to effectively
differentiate ourselves from our competitors in the drug-eluting stent market as
the leading competitor with two drug-eluting stent programs.
We expect
to launch an internally developed and manufactured next-generation
everolimus-based stent system, the PROMUS® Element™ platinum chromium coronary
stent, in Europe and certain Inter-Continental countries in late 2009 and in the
United States and Japan in mid-2012. Our supply of the existing
PROMUS® stent system from Abbott extends through the middle of the fourth
quarter of 2009 in Europe, and is currently being reviewed by the European
Commission for possible extension, and through the end of the second quarter of
2012 in the U.S. and Japan. If we are unable to obtain regulatory
approval and timely launch our PROMUS® Element stent system, the absence of an
everolimus-eluting stent in our product pipeline may materially adversely affect
our results of operations, our financial position, or financial
condition.
Worldwide
CRM market growth rates over the past three years, including the U.S. ICD
market, have been below those experienced in prior years, resulting primarily
from previous industry field actions and from a lack of new indications for
use. The U.S. ICD market represents approximately 40 percent of the
worldwide CRM market. There can be no assurance that the size of the CRM market
will increase above existing levels or that we will be able to increase CRM
market share or increase net sales in a timely manner, if at all. Net sales
from our CRM products represented approximately 28 percent of our consolidated
net sales during the year ended December 31, 2008 and there can be no
assurance of continued acceptance of our new products. Therefore,
decreases in net sales from our CRM products could have a significant impact on
our results of operations. In addition, our inability to increase our CRM net
sales, particularly in the U.S., could result in additional goodwill and
intangible asset impairment charges.
The profit margin
of a PROMUS® stent system is
significantly lower than that of our TAXUS® system and an
increase of PROMUS® sales relative
to TAXUS® sales may
adversely impact our gross profit and operating profit margins. The price we pay
Abbott for our supply of PROMUS® stent systems is
further impacted by our contractual arrangement with Abbott and is subject to
retroactive adjustment, which may also negatively impact our profit
margins. In addition, we are reliant on Abbott for supply of
PROMUS® and any
disruption to that supply could adversely effect our operating
results.
Under the
terms of our supply arrangement with Abbott, the gross profit and operating
profit margin of a PROMUS® stent system is significantly lower than that of our
TAXUS® stent system. Therefore, if sales of our PROMUS® stent system
continue to increase in relation to our total drug-eluting stent system sales,
our profit margins will continue to decrease. Further, the price we
pay Abbott for our supply of PROMUS® stent systems is determined by our
contracts with them. Our cost is based, in part, on previously fixed
25
estimates
of Abbott’s manufacturing costs for PROMUS® stent systems and third-party
reports of our average selling price of PROMUS® stent systems. Amounts paid
pursuant to this pricing arrangement are subject to a retroactive adjustment at
pre-determined intervals based on Abbott’s actual costs to manufacture these
stent systems for us and our average selling price of PROMUS® stent systems.
During 2009, we may make a payment to or receive a payment from Abbott based on
the differences between their actual manufacturing costs and the contractually
stipulated manufacturing costs and differences between our actual average
selling price and third-party reports of our average selling price, in each
case, with respect to our purchases of PROMUS® stent systems from Abbott during
2008, 2007 and 2006. As a result, during 2009, our profit margins on the PROMUS®
stent system may increase or decrease.
In
addition, we are reliant on Abbott for our supply of PROMUS® stent systems. Any
production or capacity issues that affect Abbott’s manufacturing capabilities or
our process for forecasting, ordering and receiving shipments may impact our
ability to increase or decrease the level of supply to us in a timely manner;
therefore, our supply of PROMUS® stent systems may not align with customer
demand, which could have an adverse effect on our operating
results.
Recent
deterioration in the economy and credit markets may adversely affect our future
results of operations.
As widely
reported, the global credit markets and financial services industry have been
experiencing a period of upheaval characterized by the bankruptcy, failure,
collapse or sale of various financial institutions, severely diminished
liquidity and credit availability, declines in consumer confidence, declines in
economic growth, increases in unemployment rates, uncertainty about economic
stability and an unprecedented level of intervention from the United States
federal government. There can be no assurance that there will not be
further deterioration in the global economy, credit and financial markets and
confidence in economic conditions. While the ultimate outcome of
these events cannot be predicted, it may have a material adverse effect on us
and our ability to borrow money in the credit markets and potentially to draw on
our revolving credit facility or otherwise. Similarly, our customers
and suppliers may experience financial difficulties or be unable to borrow money
to fund their operations which may adversely impact their ability or decision to
purchase our products, particularly capital equipment, or to pay for our
products they do purchase on a timely basis, if at all.
Our
share price will fluctuate, and accordingly, the value of our investment may be
unpredictable.
Stock
markets in general and our common stock in particular have experienced
significant price and volume volatility over the past year. The market price and
trading volume of our common stock may continue to be subject to significant
fluctuations due not only to general stock market conditions but also to
variability in the prevailing sentiment regarding our operations or business
prospects, as well as, among other things, potential further sales of our common
stock to satisfy the financial commitments of our historical
shareholders.
New
competitors have entered the drug-eluting stent market, which has impacted our
market share and may continue to negatively affect our net sales.
Until
2008, our TAXUS® paclitaxel-eluting coronary stent system was one of only two
drug-eluting stent products available in the U.S. Additional
competitors have recently entered the U.S. drug-eluting stent market, including
the introduction of the Endeavor® Zotarolimus-Eluting Coronary Stent by
Medtronic, Inc. and the launch of Abbott Laboratories’ XIENCE V™ drug-eluting
stent system, which has put increased pressure on our U.S. drug-eluting stent
system sales and may negatively impact our market share and average selling
prices. Our share of the U.S. drug-eluting stent market, as well as
unit prices, may continue to be impacted as the market has become more
competitive.
Our
industry is experiencing greater scrutiny and regulation by governmental
authorities, which has led to certain costs and business distractions as we
respond to inquiries and comply with new regulations, and may lead to greater
governmental regulation in the future.
26
The
medical devices we design, develop, manufacture and market are subject to
rigorous regulation by the FDA and numerous other federal, state and foreign
governmental authorities. These authorities have been increasing
their scrutiny of our industry. Recently, we have received inquiries
from Congress and other government agencies regarding, among other things, the
conduct of clinical trials, conflicts of interests and financial arrangements
with health care providers and consultants, and product promotional
practices. We are cooperating with the requests, which cooperation
involves document production costs, human resources costs and diversion of
management and employee focus. In addition, certain states, including
Massachusetts, where we are headquartered, have recently passed or are
considering legislation restricting our interactions with health care providers
and requiring disclosure of many payments to them, compliance with which will
require significant human resource and financial costs as well as complex
information technology systems. The Federal government has recently
introduced similar legislation, which may or may not preempt state
laws. Recent Supreme Court case law has clarified that the
FDA’s authority over medical devices preempts state tort laws, but legislation
has been introduced at the Federal level to allow state intervention, which
could lead to increased and inconsistent regulation at the state
level. We anticipate that the government will continue to scrutinize
our industry closely and that we will be subject to more rigorous regulation by
governmental authorities in the future.
Because
we derive a significant amount of our net sales from our cardiovascular
businesses, changes in market or regulatory conditions that impact those
businesses or our inability to develop non-cardiovascular products, could have a
material adverse effect on our business, financial condition or results of
operations.
During
2008, we derived approximately 79 percent of our net sales from our
Cardiovascular group, which includes our CRM, Cardiovascular and Neurovascular
businesses. As a result, our sales growth and profitability from our
cardiovascular businesses may be limited by risks and uncertainties related to
market or regulatory conditions that impact those businesses. If the
worldwide CRM market and the U.S. ICD market do not return to their historical
growth rates or we are unable to regain CRM market share or further increase CRM
net sales, it may adversely affect our business, financial condition or results
of operations. Net sales from drug-eluting coronary stent systems
represented approximately 20 percent of our consolidated net sales for
2008. Although we have seen a recent uptick in overall percutaneous
coronary intervention (PCI) volumes, there can be no assurance that percutaneous
coronary intervention procedures or the overall drug-eluting stent market will
recover to previous levels, which may have a material adverse effect on our
business. Similarly, our inability to develop products and technologies
successfully in addition to our drug-eluting stent and CRM technologies could
further expose us to fluctuations and uncertainties in these
markets.
Should
we be unable to resolve the remaining outstanding issues related to our FDA
warning letters in a timely manner, our business, financial condition and
results of operations, and physician perception of our products could be
materially adversely affected.
We are
currently taking remedial action in response to certain deficiencies of our
quality systems as cited by the FDA in its warning letters to us. In
January 2006, legacy Boston Scientific received a corporate warning letter
from the FDA notifying us of serious regulatory problems at three of our
facilities and advising us that our corrective action plan relating to three
site-specific warning letters issued to us in 2005 was inadequate. During 2008,
the FDA reinspected a number of our facilities and, in October 2008, informed us
that our quality system is now in substantial compliance with its Quality System
Regulations. The FDA has approved all of our requests for final
approval of Class III product submissions previously on hold due to the
corporate warning letter, and has approved all of our currently eligible
requests for Certificates to Foreign Governments (CFGs). The
corporate warning letter remains in place pending final remediation of certain
Medical Device Report (MDR) filing issues. This remediation has resulted and may
continue to result in medical device and vigilance reporting, which could
adversely impact physician perception of our products.
We may
face enforcement actions in connection with these FDA warning letters, including
injunctive relief, consent decrees or civil fines. While we are working with the
FDA to resolve the remaining outstanding
27
issues,
this work has required and will continue to require the dedication of
significant incremental internal and external resources and has resulted in
adjustments to the product launch schedules of certain products and the decision
to discontinue certain other product lines over time. 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. In addition, 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,
assessing civil monetary penalties or imposing a consent decree on us, which
could result in further regulatory constraints, including the governance of our
quality system by a third party. If we, or our manufacturers, fail to adhere to
quality system regulations or ISO requirements, this could delay production of
our products and lead to fines, difficulties in obtaining regulatory clearances,
recalls or other consequences, which could, in turn, have a material adverse
effect on our financial condition or results of operations.
We
are subject to extensive medical device regulation, which may impede or hinder
the approval or sale of our products and, in some cases, may ultimately result
in an inability to obtain approval of certain products or may result in the
recall or seizure of previously approved products.
Our
products, development activities and manufacturing processes are subject to
extensive and rigorous regulation by the FDA pursuant to the Federal Food, Drug,
and Cosmetic Act (FDC Act), by comparable agencies in foreign countries, and by
other regulatory agencies and governing bodies. Under the FDC Act, medical
devices must receive FDA clearance or approval before they can be commercially
marketed in the U.S. In addition, most major markets for medical devices outside
the U.S. require clearance, approval or compliance with certain standards before
a product can be commercially marketed. The process of obtaining marketing
approval or clearance from the FDA for new products, or with respect to
enhancements or modifications to existing products, could:
|
•
|
take
a significant period of time;
|
|
•
|
require
the expenditure of substantial
resources;
|
|
•
|
involve
rigorous pre-clinical and clinical testing, as well as increased
post-market surveillance;
|
|
•
|
require
changes to products; and
|
|
•
|
result
in limitations on the indicated uses of
products.
|
Countries
around the world have adopted more stringent regulatory requirements that have
added or are expected to add to the delays and uncertainties associated with new
product releases, as well as the clinical and regulatory costs of supporting
those releases. Even after products have received marketing approval or
clearance, product approvals and clearances by the FDA can be withdrawn due to
failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial approval. There can be no assurance that we will
receive the required clearances for new products or modifications to existing
products on a timely basis or that any approval will not be subsequently
withdrawn or conditioned upon extensive post-market study
requirements.
In
addition, regulations regarding the development, manufacture and sale of medical
devices are subject to future change. We cannot predict what impact, if any,
those changes might have on our business. Failure to comply with regulatory
requirements could have a material adverse effect on our business, financial
condition and results of operations. Later discovery of previously unknown
problems with a product or manufacturer could result in fines, delays or
suspensions of regulatory clearances, seizures or recalls of products, operating
restrictions and/or criminal prosecution. The failure to receive product
approval clearance on a timely basis, suspensions of regulatory clearances,
seizures or recalls of products or the withdrawal of product approval by the FDA
could have a material adverse effect on our business, financial
28
condition
or results of operations.
We
may not meet regulatory quality standards applicable to our manufacturing and
quality processes, which could have an adverse effect on our business, financial
condition and results of operations.
As a
medical device manufacturer, we are required to register with the FDA and are
subject to periodic inspection by the FDA for compliance with its Quality System
Regulation (QSR) requirements, which require manufacturers of medical devices to
adhere to certain regulations, including testing, quality control and
documentation procedures. In addition, the Federal Medical Device Reporting
regulations require us to provide information to the FDA whenever there is
evidence that reasonably suggests that a device may have caused or contributed
to a death or serious injury or, if a malfunction were to occur, could cause or
contribute to a death or serious injury. Compliance with applicable regulatory
requirements is subject to continual review and is monitored rigorously through
periodic inspections by the FDA. In the European Community, we are required to
maintain certain ISO certifications in order to sell our products and must
undergo periodic inspections by notified bodies to obtain and maintain these
certifications.
We
may not effectively be able to protect our intellectual property rights,
which could have a material adverse effect on our business, financial condition
or results of operations.
The
medical device market in which we primarily participate is in large part
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 or other
products infringe patents owned or licensed by them. We have similarly
asserted that stent systems or other products sold by our
competitors infringe patents owned or licensed by us. Adverse outcomes in
one or more of these 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. In addition, damage awards related to historical
sales could be material.
Patents
and other proprietary rights are and will continue to be essential to our
business, and our ability to compete effectively with other companies will be
dependent upon the proprietary nature of our technologies. We rely upon trade
secrets, know-how, continuing technological innovations, strategic alliances and
licensing opportunities to develop, maintain and strengthen our competitive
position. We pursue a policy of generally obtaining patent protection in both
the U.S. and abroad for patentable subject matter in our proprietary devices and
attempt to review third-party patents and patent applications to the extent
publicly available in order to develop an effective patent strategy, avoid
infringement of third-party patents, identify licensing opportunities and
monitor the patent claims of others. We currently own numerous U.S. and foreign
patents and have numerous patent applications pending. We also are party to
various license agreements pursuant to which patent rights have been obtained or
granted in consideration for cash, cross-licensing rights or royalty payments.
No assurance can be made that any pending or future patent applications will
result in the issuance of patents, that any current or future patents issued to,
or licensed by, us will not be challenged or circumvented by our competitors, or
that our patents will not be found invalid.
29
In
addition, we may have to take legal action in the future to protect our patents,
trade secrets or know-how or to assert them against claimed infringement by
others. Any legal action of that type could be costly and time consuming and no
assurances can be made that any lawsuit will be successful. We are generally
involved as both a plaintiff and a defendant in a number of patent infringement
and other intellectual property-related actions. We are involved in numerous
patent-related claims with our competitors, including Johnson &
Johnson.
The
invalidation of key patents or proprietary rights that we own, or an
unsuccessful outcome in lawsuits to protect our intellectual property, could
have a material adverse effect on our business, financial position or results of
operations.
Pending
and future intellectual property litigation could be costly and disruptive to
us.
We
operate in an industry that is susceptible to significant intellectual property
litigation and, in recent years, it has been common for companies in the medical
device field to aggressively challenge the patent rights of other companies in
order to prevent the marketing of new devices. We are currently the subject of
various patent litigation proceedings and other proceedings described in more
detail under Item
3. Legal Proceedings. Intellectual property litigation is expensive,
complex and lengthy and its outcome is difficult to predict. Pending or future
patent litigation may result in significant royalty or other payments or
injunctions that can prevent the sale of products and may significantly divert
the attention of our technical and management personnel. In the event that our
right to market any of our products is successfully challenged, we may be
required to obtain a license on terms which may not be favorable to us, if at
all. If we fail to obtain a required license or are unable to design
around a patent, our business, financial condition or results of operations
could be materially adversely affected.
Pending
and future product liability claims and other litigation, including private
securities litigation, shareholder derivative suits and contract litigation, may
adversely affect our business, reputation and ability to attract and retain
customers.
The
design, manufacture and marketing of medical devices of the types that we
produce entail an inherent risk of product liability claims. Many of the medical
devices that we manufacture and sell are designed to be implanted in the human
body for long periods of time or indefinitely. A number of factors could result
in an unsafe condition or injury to, or death of, a patient with respect to
these or other products that we manufacture or sell, including component
failures, manufacturing flaws, design defects or inadequate disclosure of
product-related risks or product-related information. These factors could result
in product liability claims, a recall of one or more of our products or a safety
alert relating to one or more of our products. Product liability claims may be
brought by individuals or by groups seeking to represent a class.
We are
currently the subject of numerous product liability claims and other litigation,
including private securities litigation and shareholder derivative suits
including, but not limited to, the claims and litigation described under Item 3. Legal
Proceedings. Our efforts to settle product liability cases, including
Guidant litigation, may not be successful.
The
outcome of litigation, particularly class action lawsuits, is difficult to
assess or quantify. Plaintiffs in these types of lawsuits often seek recovery of
very large or indeterminate amounts, including not only actual damages, but also
punitive damages. The magnitude of the potential losses relating to these
lawsuits may remain unknown for substantial periods of time. In addition, the
cost to defend against any future litigation may be significant. Further, we are
substantially self-insured with respect to product liability claims. We maintain
insurance policies providing limited coverage against securities claims. The
absence of significant third-party insurance coverage increases our potential
exposure to unanticipated claims and adverse decisions. Product liability
claims, product recalls, securities litigation and other litigation in the
future,
30
regardless
of the outcome, could have a material adverse effect on our financial position,
results of operations or liquidity.
We
may not be successful in our strategic acquisitions of, investments in or
alliances with, other companies and businesses, which have been a significant
source of historical growth for us.
Our
strategic acquisitions, investments and alliances are intended to further expand
our ability to offer customers effective, high quality medical devices that
satisfy their interventional needs. If we are unsuccessful in our acquisitions,
investments and alliances, we may be unable to continue to grow our business
significantly or may record asset impairment charges in the future. These
acquisitions, investments and alliances have been
significant sources of growth for us. The success of any acquisition, investment
or alliance that we may undertake will depend on a number of factors,
including:
|
•
|
our
ability to identify suitable opportunities for acquisition, investment or
alliance, if at all;
|
|
•
|
our
ability to finance any future acquisition, investment or alliance on terms
acceptable to us, if at all;
|
|
•
|
whether
we are able to establish an acquisition, investment or alliance on terms
that are satisfactory to us, if at
all;
|
|
•
|
the
strength of the other companies’ underlying technology and ability to
execute;
|
|
•
|
regulatory approvals and reimbursement levels of the acquired
products and related procedures;
|
|
•
|
intellectual
property and litigation related to these technologies;
and
|
|
•
|
our
ability to successfully integrate the acquired company or business with
our existing business, including the ability to adequately fund acquired
in-process research and development
projects.
|
If we are
unsuccessful in our acquisitions, investments and alliances, we may be unable to
continue to grow our business significantly or may record asset impairment
charges in the future.
We
may not realize the expected benefits from our plant network optimization
initiatives; our long-term expense reduction programs may result in an increase
in short-term expense; and our efforts may lead to additional unintended
consequences.
In early
2009, we announced our Plant Network Optimization plan, aimed at
simplifying our plant network, reducing our manufacturing costs and improving
gross margins. Activities under the plan could yield unintended consequences,
such as distraction of our management and employees, business disruption,
attrition beyond our planned reduction in workforce and reduced employee
productivity. We may be unable to attract or retain key
personnel. Attrition in connection with our plant network
optimization efforts or a material decrease in employee morale or productivity
could negatively affect our business, financial condition and results of
operations. In addition, head count reductions may subject us to the
risk of litigation, which could result in substantial cost. Moreover,
our plant network optimization program will result in charges and expenses that
will impact our operating results. We cannot guarantee that these
measures, or other expense reduction measures we take in the future, will result
in the expected cost savings.
We
incurred substantial indebtedness in connection with our acquisition of Guidant
and if we are unable to manage our debt levels, it could have an adverse effect
on our financial condition or results of operations.
We had
total debt of $6.745 billion at December 31, 2008, attributable in large part to
our acquisition of Guidant. We expect to use a significant portion of our
operating cash flows to reduce our outstanding debt obligations over the next
several years. We are examining all of our operations in order to identify cost
improvement measures that will better align operating expenses with expected
revenue levels and cash
31
flows,
and have sold certain non-strategic assets and have implemented other strategic
initiatives to generate proceeds that would be available for debt
repayment. There can be no assurance that these initiatives will
be effective in reducing expenses sufficiently to enable us to repay our
indebtedness. Our term loan and revolving credit facility agreement
contains financial covenants that require us to maintain specified financial
ratios. If we are unable to satisfy these covenants, we may be required to
obtain waivers from our lenders and no assurance can be made that our lenders
would grant such waivers on favorable terms or at all, particularly in light of
the current tightening in the credit markets.
Our
credit ratings are currently below investment grade, which could have an adverse
impact on our ability to borrow funds or issue debt securities in the public
capital markets.
Our
current credit ratings from Standard & Poor’s Rating Services (S&P) and
Fitch Ratings are BB+, and our credit rating from Moody’s Investor Service is
Ba1. All of these are below investment grade ratings and the ratings outlook by
S&P and Moody’s is currently negative. Our inability to regain
investment grade credit ratings could impact our ability to obtain financing on
terms reasonably acceptable to us, and increase the cost of borrowing funds in
the future.
Our
future growth is dependent upon the development of new products, which requires
significant research and development, clinical trials and regulatory approvals,
all of which are very expensive and time-consuming and may not result in a
commercially viable product.
In order
to develop new products and improve current product offerings, we focus our
research and development programs largely on the development of next-generation
and novel technology offerings across multiple programs and divisions,
particularly in our drug-eluting stent and CRM programs. We expect to
launch our next-generation everolimus-based stent system, the PROMUS® Element™
platinum chromium coronary stent, in Europe in late 2009 and in the United
States in mid-2012, subject to regulatory approval. In addition, we expect to
continue to invest in our CRM technologies, including our LATITUDE® Patient
Management System and our next-generation products and technologies. If we are
unable to develop and launch these and other products as anticipated, our
ability to maintain or expand our market position in the drug-eluting stent and
CRM markets may be materially adversely impacted.
Further,
we expect to invest selectively in areas outside of drug-eluting stent and CRM
technologies. There can be no assurance that these or other technologies will
achieve technological feasibility, obtain regulatory approval or gain market
acceptance. A delay in the development or approval of these technologies or our
decision to reduce funding of these projects may adversely impact the
contribution of these technologies to our future growth.
As a part
of the regulatory process of obtaining marketing clearance for new products, we
conduct and participate in numerous clinical trials with a variety of study
designs, patient populations and trial endpoints. 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 ability to obtain product approvals, our position
in, and share of, the markets in which we participate and our business,
financial condition, results of operations or future prospects.
We
face intense competition and may not be able to keep pace with the rapid
technological changes in the medical devices industry, which could have an
adverse effect on our business, financial condition or results of
operations.
The
medical device market is highly competitive. We encounter significant
competition across our product lines and in each market in which our products
are sold from various medical device companies, some of which may have greater
financial and marketing resources than we do. Our primary competitors have
historically included Johnson & Johnson (including its subsidiary,
Cordis Corporation) and Medtronic, Inc. (including its subsidiary,
Medtronic AVE, Inc.). Through our acquisition of Guidant, Abbott has become
a primary competitor of ours in the interventional cardiology market and we now
compete with St. Jude
32
Medical, Inc.
in the CRM and neuromodulation markets. In addition, we face competition from a
wide range of companies that sell a single or a limited number of competitive
products or which participate in only a specific market segment, as well as from
non-medical device companies, including pharmaceutical companies, which may
offer alternative therapies for disease states intended to be treated using our
products.
Additionally,
the medical device market is characterized by extensive research and
development, and rapid technological change. Developments by other companies of
new or improved products, processes or technologies, in particular in the
drug-eluting stent and CRM markets, may make our products or proposed products
obsolete or less competitive and may negatively impact our net sales. We are
required to devote continued efforts and financial resources to develop or
acquire scientifically advanced technologies and products, apply our
technologies cost-effectively across product lines and markets, attract and
retain skilled development personnel, obtain patent and other protection for our
technologies and products, obtain required regulatory and reimbursement
approvals and successfully manufacture and market our products consistent with
our quality standards. If we fail to develop new products or enhance existing
products, it could have a material adverse effect on our business, financial
condition or results of operations.
Because
we derive a significant amount of our net sales from international operations
and a significant percentage of our future growth is expected to come from
international operations, changes in international economic or regulatory
conditions could have a material impact on our business, financial condition or
results of operations.
Sales
outside the U.S. accounted for approximately 43 percent of our net sales in
2008. Additionally, a significant percentage of our future growth is expected to
come from international operations. As a result, our sales growth and
profitability from our international operations may be limited by risks and
uncertainties related to economic conditions in these regions, foreign currency
fluctuations, interest rate fluctuations, regulatory and reimbursement
approvals, competitive offerings, infrastructure development, rights to
intellectual property and our ability to implement our overall business
strategy. Further, international markets are also being affected by economic
pressure to contain reimbursement levels and healthcare costs; and
international markets may also be impacted by foreign government efforts to
understand healthcare practices and pricing in other countries, which
could result in increased pricing transparency across geographies and pressure to harmonize reimbursement
and ultimately reduce the selling
prices of our products. The trend
in countries around the world, including Japan, toward more stringent regulatory
requirements for product clearance, changing reimbursement models and more
rigorous inspection and enforcement activities has generally caused or may cause
medical device manufacturers to experience more uncertainty, delay, risk and
expense. In addition, most international jurisdictions have adopted regulatory
approval and periodic renewal requirements for medical devices, and we must
comply with these requirements in order to market our products in these
jurisdictions. Any significant changes in the competitive, political, legal,
regulatory, reimbursement or economic environment where we conduct international
operations may have a material impact on our business, financial condition or
results of operations.
Healthcare
cost containment pressures and legislative or administrative reforms resulting
in restrictive reimbursement practices of third-party payors or preferences for
alternate therapies could decrease the demand for our products, the prices which
customers are willing to pay for those products and the number of procedures
performed using our devices, which could have an adverse effect on our business,
financial condition or results of operations.
Our
products are purchased principally by hospitals, physicians and other healthcare
providers around the world that typically bill various third-party payors,
including governmental programs (e.g., Medicare and Medicaid), private insurance
plans and managed care programs, for the healthcare services provided to their
patients. The ability of customers to obtain appropriate reimbursement for their
products and services from private and governmental third-party payors is
critical to the success of medical technology companies. The availability of
reimbursement affects which products customers purchase and the prices they are
willing to pay. Reimbursement varies from country to country and can
significantly impact the acceptance of new products and services. After we
develop a promising new product, we may find limited demand for the product
unless reimbursement approval is obtained from private and governmental
third-party payors. Further legislative or administrative reforms to the
reimbursement systems in the U.S., Japan, or other international countries in a
manner that significantly reduces reimbursement for procedures using our
33
medical
devices or denies coverage for those procedures could have a material adverse
effect on our business, financial condition or results of
operations.
Major
third-party payors for hospital services in the U.S. and abroad continue to work
to contain healthcare costs. The introduction of cost containment incentives,
combined with closer scrutiny of healthcare expenditures by both private health
insurers and employers, has resulted in increased discounts and contractual
adjustments to hospital charges for services performed and has shifted services
between inpatient and outpatient settings. Initiatives to limit the increase of
healthcare costs, including price regulation, are also underway in several
countries in which we do business. Hospitals or physicians may respond to these
cost-containment pressures by substituting lower cost products or other
therapies for our products. In connection with Guidant’s product recalls,
certain third-party payors have sought, and others may seek, recourse against us
for amounts previously reimbursed.
Consolidation
in the healthcare industry could lead to demands for price concessions or the
exclusion of some suppliers from certain of our significant market segments,
which could have an adverse effect on our business, financial condition or
results of operations.
The cost
of healthcare has risen significantly over the past decade and numerous
initiatives and reforms by legislators, regulators and third-party payors to
curb these costs have resulted in a consolidation trend in the healthcare
industry, including hospitals. This in turn has resulted in greater pricing
pressures and the exclusion of certain suppliers from important market segments
as group purchasing organizations, independent delivery networks and large
single accounts continue to consolidate purchasing decisions for some of our
hospital customers. We expect that market demand, government regulation,
third-party reimbursement policies, government contracting requirements, and
societal pressures will continue to change the worldwide healthcare industry,
resulting in further business consolidations and alliances among our customers
and competitors, which may reduce competition, exert further downward pressure
on the prices of our products and adversely impact our business, financial
condition or results of operations.
We
rely on external manufacturers to supply us with materials and components used
in our products and external providers to sterilize our products, and any
disruption in sources of supply or any ability to sterilize our products could
adversely impact our production efforts and could materially adversely affect
our business, financial condition or results of operations.
We
vertically integrate operations where integration provides significant cost,
supply or quality benefits. However, we purchase many of the materials and
components used in manufacturing our products, some of which are custom made.
Certain supplies are purchased from single-sources due to quality
considerations, expertise, costs or constraints resulting from regulatory
requirements. We may not be able to establish additional or replacement
suppliers for certain components or materials in a timely manner largely due to
the complex nature of our and many of our suppliers’ manufacturing processes.
Production issues, including capacity constraint; quality issues affecting us or
our suppliers; an inability to develop and validate alternative sources if
required; or a significant increase in the price of materials or components
could adversely affect our operations and financial condition.
In
addition, our products require sterilization prior to sale and we rely primarily
on third party vendors to perform this service. To the
extent our third party sterilizers are unable
to process our products, whether due to raw material,
capacity, regulatory or other constraints, we may be unable to
transition to other providers in a timely manner, which could have an
adverse impact on our operations.
ITEM
1B. UNRESOLVED STAFF
COMMENTS
There are
no unresolved written comments that were received from the SEC staff
180 days or more before the end of our fiscal year relating to our periodic
or current reports under the Securities Exchange Act of 1934.
34
ITEM 2. PROPERTIES
Our world
headquarters are located in Natick, Massachusetts, with additional support
provided from regional headquarters located in Tokyo, Japan and Paris,
France. As of December 31, 2008, our manufacturing, research, distribution
and other key facilities totaled approximately 10 million square feet, seven
million of which are owned by us, with the balance under lease
arrangements. As of December 31, 2008, our principal manufacturing and
technology centers were located in Minnesota, California, Florida, Indiana,
Utah, Washington, Ireland, Costa Rica and Puerto Rico. Our products are
distributed internationally from customer fulfillment centers in Massachusetts,
The Netherlands and Japan. As of December 31, 2008, we maintained 17
manufacturing facilities; nine in the U.S.; one in Puerto Rico; five in Ireland;
and two in Costa Rica; as well as various distribution and technology centers.
Many of these facilities produce and manufacture products for more than
one of our divisions and include research facilities.
The
following is a summary of our facilities (in square feet):
|
Owned
|
Leased
|
Total
|
|||||||||||
|
Domestic
|
5,486,831 | 1,542,026 | 7,028,857 | ||||||||||
|
Foreign
|
1,385,599 | 1,418,694 | 2,804,293 | ||||||||||
| 6,872,430 | 2,960,720 | 9,833,150 | |||||||||||
See Note L—Commitments and
Contingencies to our 2008 consolidated financial statements included in
Item 8 of this Annual Report.
None.
35
PART II
ITEM
5. MARKET FOR THE
COMPANY’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our
common stock is traded on the New York Stock Exchange (NYSE) under the symbol
“BSX.” Our
annual CEO certification for the previous year has been submitted to the
NYSE.
The
following table provides the market range for our common stock for each of the
last eight quarters based on reported sales prices on the NYSE.
|
High
|
Low
|
||||||||
|
2008
|
|||||||||
|
First
Quarter
|
$ | 13.21 | $ | 10.98 | |||||
|
Second
Quarter
|
14.11 | 12.23 | |||||||
|
Third
Quarter
|
13.89 | 11.75 | |||||||
|
Fourth
Quarter
|
11.47 | 5.48 | |||||||
|
2007
|
|||||||||
|
First
Quarter
|
$ | 18.59 | $ | 14.22 | |||||
|
Second
Quarter
|
16.67 | 14.59 | |||||||
|
Third
Quarter
|
15.72 | 12.16 | |||||||
|
Fourth
Quarter
|
15.03 | 11.47 | |||||||
We did
not pay a cash dividend in 2008, 2007 or 2006. We currently do not intend to pay
dividends, and intend to retain all of our earnings to repay indebtedness and
invest in the continued growth of our business. We may consider declaring and
paying a dividend in the future; however, there can be no assurance that we will
do so.
At
February 20, 2009, there were 16,934 record holders of our common
stock.
The
closing price of our common stock on February 20, 2009 was
$8.18.
We did
not repurchase any of our common stock in 2008, 2007 or 2006. There are
approximately 37 million remaining shares authorized for purchase under our
share repurchase program. We currently do not anticipate material repurchases in
2009.
Stock
Performance Graph
The graph
below compares the five-year total return to stockholders on our common stock
with the return of the Standard & Poor’s 500 Stock Index and the Standard
& Poor’s Healthcare Equipment Index. The graph assumes $100 was invested in
our common stock and in each of the named indices on January 1, 2004, and that
all dividends were reinvested.
36
37
ITEM
6. SELECTED
FINANCIAL DATA
FIVE-YEAR
SELECTED FINANCIAL DATA
(in
millions, except per share data)
|
Operating
Data
|
||||||||||||||||||||
|
Year
Ended December 31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Net
sales
|
$ | 8,050 | $ | 8,357 | $ | 7,821 | $ | 6,283 | $ | 5,624 | ||||||||||
|
Gross
profit
|
5,581 | 6,015 | 5,614 | 4,897 | 4,332 | |||||||||||||||
|
Selling,
general and administrative expenses
|
2,589 | 2,909 | 2,675 | 1,814 | 1,742 | |||||||||||||||
|
Research
and development expenses
|
1,006 | 1,091 | 1,008 | 680 | 569 | |||||||||||||||
|
Royalty
expense
|
203 | 202 | 231 | 227 | 195 | |||||||||||||||
|
Amortization
expense
|
543 | 620 | 474 | 142 | 112 | |||||||||||||||
|
Goodwill
and intangible asset impairment charges
|
2,790 | 21 | 56 | 10 | ||||||||||||||||
|
Acquisition-related
milestone
|
(250 | ) | ||||||||||||||||||
|
Purchased
research and development
|
43 | 85 | 4,119 | 276 | 65 | |||||||||||||||
|
Gain
on divestitures
|
(250 | ) | ||||||||||||||||||
|
Loss
on assets held for sale
|
560 | |||||||||||||||||||
|
Restructuring
charges
|
78 | 176 | ||||||||||||||||||
|
Litigation-related
charges
|
334 | 365 | 780 | 75 | ||||||||||||||||
|
Total
operating expenses
|
7,086 | 6,029 | 8,563 | 3,929 | 2,758 | |||||||||||||||
|
Operating
(loss) income
|
(1,505 | ) | (14 | ) | (2,949 | ) | 968 | 1,574 | ||||||||||||
|
(Loss)
income before income taxes
|
(2,031 | ) | (569 | ) | (3,535 | ) | 891 | 1,494 | ||||||||||||
|
Net
(loss) income
|
(2,036 | ) | (495 | ) | (3,577 | ) | 628 | 1,062 | ||||||||||||
|
Net
(loss) income per common share:
|
||||||||||||||||||||
|
Basic
|
$ | (1.36 | ) | $ | (0.33 | ) | $ | (2.81 | ) | $ | 0.76 | $ | 1.27 | |||||||
|
Assuming
dilution
|
$ | (1.36 | ) | $ | (0.33 | ) | $ | (2.81 | ) | $ | 0.75 | $ | 1.24 | |||||||
|
Weighted-average
shares outstanding — basic
|
1,498.5 | 1,486.9 | 1,273.7 | 825.8 | 838.2 | |||||||||||||||
|
Weighted-average
shares outstanding — assuming dilution
|
1,498.5 | 1,486.9 | 1,273.7 | 837.6 | 857.7 | |||||||||||||||
|
Balance
Sheet Data
|
||||||||||||||||||||
|
As
of December 31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Cash,
cash equivalents and marketable securities
|
$ | 1,641 | $ | 1,452 | $ | 1,668 | $ | 848 | $ | 1,640 | ||||||||||
|
Working
capital*
|
2,219 | 2,691 | 3,399 | 1,152 | 684 | |||||||||||||||
|
Total
assets
|
27,139 | 31,197 | 30,882 | 8,196 | 8,170 | |||||||||||||||
|
Borrowings
(long-term and short-term)
|
6,745 | 8,189 | 8,902 | 2,020 | 2,367 | |||||||||||||||
|
Stockholders’
equity
|
13,174 | 15,097 | 15,298 | 4,282 | 4,025 | |||||||||||||||
|
Book
value per common share
|
$ | 8.77 | $ | 10.12 | $ | 10.37 | $ | 5.22 | $ | 4.82 | ||||||||||
|
*
|
In
2008 and 2007, we reclassified certain assets and liabilities to the
“Assets held for sale” and “Liabilities associated with assets held for
sale” captions in our consolidated balance sheets. These assets and
liabilities are labeled as ‘current’ to give effect to the short term
nature of those assets and liabilities that were divested in the first
quarter of 2008 in connection with the sale of certain of our businesses,
or assets that are expected to be sold in 2009. We have reclassified 2007
balances for comparison purposes on the face of the consolidated balance
sheets, and restated both 2007 and 2006 in the working capital metric
above. We have not restated working capital for 2005 or 2004, as we did
not have assets and liabilities held for sale prior to 2006, nor are they
presented on the face of the consolidated balance
sheets.
|
See also the notes to our consolidated
financial statements included in Item 8 of this Annual
Report.
38
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 contained in Item 8 of
this Annual Report.
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 business strategy is to lead global markets for less-invasive
medical devices by developing and delivering products and therapies that address
unmet patient needs, provide superior clinical outcomes and demonstrate
compelling economic value. We intend to achieve leadership, drive profitable
sales growth and increase shareholder value by focusing on:
|
•
|
Customers
|
|
•
|
Innovation
|
|
•
|
Quality
|
|
•
|
People
|
|
•
|
Financial
Strength
|
In the
first quarter of 2008, we completed the divestiture of certain non-strategic
businesses. Our operating results for the years ended December 31, 2007 and 2006
include a full year of results of these businesses. Our operating results for
the year ended December 31, 2008 include the results of these businesses through
the date of separation. We are involved in several post-closing separation
activities through transition service agreements, some from which we continue to
generate net sales. These transition service agreements expire throughout 2009
and the first half of 2010. Refer to the Strategic Initiatives section
and Note F – Divestitures and
Assets Held for Sale to our consolidated financial statements contained
in Item 8 of this Annual Report for a description of
these business divestitures.
On April
21, 2006, we consummated the acquisition of Guidant Corporation. With this
acquisition, we became a major provider in the cardiac rhythm management (CRM)
market, enhancing our overall competitive position and long-term growth
potential, and further diversifying our product portfolio. We also now share
certain drug-eluting stent technology with Abbott Laboratories, which gives us
access to a second drug-eluting stent program, and complements our
TAXUS® stent system program. See Note D- Acquisitions to our 2008
consolidated financial statements included in Item 8 of this Annual Report
for further details on the Guidant acquisition and Abbott transaction. Our
operating results for the years ended December 31, 2008 and 2007 include a full
year of results of our CRM business that we acquired from Guidant. Our operating
results for the year ended December 31, 2006 include the results of the CRM
business beginning on the date of acquisition. We have included supplemental pro
forma financial information in
Note D – Acquisitions to our 2008 consolidated financial statements
included in Item 8 of this Annual Report which gives effect to the
acquisition as though it had occurred at the beginning of 2006.
Executive
Summary
Financial Highlights and
Trends
Net sales
in 2008 were $8.050 billion, which included sales from divested businesses
of $69 million, as compared to net sales of $8.357 billion in 2007, which
included sales from divested business of $553 million, a decrease of $307
million or four percent. Foreign currency fluctuations increased our net sales
by $213 million in 2008, as compared to 2007. Excluding the impact of foreign
currency and sales from divested businesses, our net sales were flat with the
prior year.
Worldwide
net sales of our CRM products increased eight percent in 2008, including an
eight percent
39
increase
in our U.S. CRM net sales and a seven percent increase in international CRM
product net sales. These increases were driven by multiple product launches
in both our U.S. and international markets, highlighted by the launch
of our COGNIS® cardiac resynchronization therapy defibrillator (CRT-D) system
and our TELIGEN® implantable cardioverter defibrillator (ICD) system. In
addition, net sales from our Endosurgery businesses grew eight percent and our
Neuromodulation division increased net sales by twenty percent in 2008, as
compared to 2007. Partially offsetting these increases, was a decline in
worldwide net sales from our Cardiovascular division of four percent during
2008, due principally to the impact of new competition in the U.S. drug-eluting
stent market. However, we realized increased U.S. drug-eluting stent
market share in the fourth quarter of 2008, as compared to the third quarter of
2008, and exited the year with an estimated 49 percent share of the U.S.
drug-eluting stent market for the month of December.
Our
reported net loss for 2008 was $2.036 billion, or $1.36 per share, on
approximately 1.5 billion weighted-average shares outstanding, as compared to a
net loss for 2007 of $495 million, or $0.33 per share, also on 1.5 billion
weighted-average shares outstanding. Our reported results for 2008 included
goodwill and intangible asset impairment charges and acquisition-, divestiture-,
litigation- and restructuring-related net charges; and discrete tax items of
$2.796 billion (after-tax), or $1.87 per share, consisting of:
|
|
•
|
$2.756 billion
($2.790 billion pre-tax) of goodwill and intangible asset impairment
charges, associated primarily with a write-down of
goodwill;
|
|
•
|
a
$184 million gain ($250 million pre-tax) related to the receipt of an
acquisition-related milestone payment from
Abbott;
|
|
•
|
$44
million ($43 million pre-tax) of net purchased research and development
charges, associated primarily with the acquisitions of Labcoat, Ltd. and
CryoCor, Inc.;
|
|
•
|
$100 million of
costs ($133 million pre-tax) associated with our on-going expense and head
count reduction initiatives;
|
|
•
|
a
$185 million gain ($250 million pre-tax), associated with the sale of
certain non-strategic
businesses;
|
|
•
|
$54
million of net losses ($80 million pre-tax) in connection with the sale of
certain non-strategic
investments;
|
|
•
|
$238 million of
litigation-related charges ($334 million pre-tax) resulting primarily from
a ruling by a federal judge in a patent infringement case brought against
us by Johnson & Johnson;
and
|
|
•
|
$27
million of discrete tax benefits related to certain tax positions
associated with prior period acquisition-, divestiture-, litigation- and
restructuring-related
charges.
|
During
the fourth quarter of 2008, we recorded a $2.613 billion goodwill impairment
charge associated with our acquisition of Guidant. The decline in our stock
price and our market capitalization during the fourth quarter created an
indication of potential impairment of our goodwill balance; therefore, we
performed an interim impairment test. Key factors contributing to the impairment
charge included disruptions in the credit and equity markets, and the resulting
impacts to weighted-average costs of capital, and changes in CRM market demand
relative to our original assumptions at the time of acquisition. Refer to Note E – Goodwill and Other
Intangible Assets to our consolidated financial statements contained in
Item 8 of this Annual Report for more information.
Our
reported results for 2007 included goodwill and intangible asset impairment
charges and acquisition-, divestiture-, litigation- and restructuring-related
charges of $1.110 billion (after-tax), or $0.74 per share. Refer to
Liquidity and Capital
Resources for a discussion of these charges.
We
continued to generate substantial cash flow during 2008. Cash provided by
operating activities was $1.216 billion in 2008 as compared to $934 million
in 2007. At December 31, 2008, we had total debt of $6.745 billion, cash and
cash equivalents of $1.641 billion and working capital of $2.219 billion. During
2008, we prepaid $1.425 billion of debt under our term loan and our credit
facility secured by our U.S. trade receivables and, in February 2009, prepaid an
additional $500 million. As a result, our next scheduled debt maturity is $325
million due in April 2010.
40
Strategic
Initiatives
In 2007,
we announced several new initiatives designed to enhance short- and long-term
shareholder value, including the restructuring of several of our businesses and
product franchises; the sale of non-strategic businesses and investments; and
significant expense and head count reductions. Our goal was, and continues to
be, to better align expenses with revenues, while preserving our ability to make
needed investments in quality, research and development (R&D), capital
improvements and our people that are essential to our long-term success. These
initiatives have helped to provide better focus on our core businesses and
priorities, which we believe will strengthen Boston Scientific for the future
and position us for increased, sustainable and profitable sales growth. The
execution of this plan enabled us to reduce R&D and selling, general and
administrative (SG&A) expenses by an annualized run rate of approximately
$500 million exiting 2008.
Restructuring
In
October 2007, our Board of Directors approved, and we committed to, an expense
and head count reduction plan, which resulted in the elimination of
approximately 2,300 positions worldwide. We initiated activities under the plan
in the fourth quarter of 2007 and expect to be substantially complete worldwide
in 2010. Refer to Results of
Operations and Note H – Restructuring-related
Activities to our consolidated financial statements included in Item 8 of
this Annual Report for information on restructuring-related activities and
estimated costs.
Plant
Network Optimization
On
January 27, 2009, our Board of Directors approved, and we committed to, a plant
network optimization plan, which is intended to simplify our manufacturing plant
structure by transferring certain production lines from one facility to another
and by closing certain facilities. The plan is a complement to our previously
announced expense and head count reduction plan, and is intended to improve
overall gross profit margins. Activities under the plan will be initiated in
2009 and are expected to be substantially completed by the end of 2011. Refer
to Results of Operations
and Note H –
Restructuring-related Activities to our consolidated financial statements
included in Item 8 of this Annual Report for information on
restructuring-related activities and estimated costs.
Divestitures
During
2007, we determined that our Auditory, Vascular Surgery, Cardiac Surgery, Venous
Access and Fluid Management businesses were no longer strategic to our on-going
operations. Therefore, we initiated the process of selling these businesses in
2007, and completed their sale in the first quarter of 2008, as discussed below.
We received pre-tax proceeds of approximately $1.3 billion from the sale of
these businesses and our TriVascular Endovascular Aortic Repair (EVAR) program,
and eliminated 2,000 positions in connection with these
divestitures.
In
January 2008, we completed the sale of a controlling interest in our Auditory
business and drug pump development program, acquired with Advanced Bionics
Corporation in 2004, to entities affiliated with the principal former
shareholders of Advanced Bionics for an aggregate purchase price of $150 million
in cash. In
connection with the sale, we recorded a loss of $367 million (pre-tax) in 2007,
attributable primarily to the write-down of goodwill. In addition, we recorded a
tax benefit of $7 million during 2008 in connection with the closing of the
transaction. Also in January 2008, we completed the sale of our Cardiac Surgery
and Vascular Surgery businesses for net cash proceeds of approximately $700
million. In connection with the sale, we recorded a pre-tax loss of $193 million
in 2007, representing primarily a write-down of goodwill. In addition, we
recorded a tax expense of $19 million during 2008 in connection with the closing
of the transaction. In February 2008, we completed the sale of our Fluid
Management and Venous Access businesses for net cash proceeds of approximately
$400 million. We recorded a pre-tax gain of $234 million ($161
million after-tax) during 2008 associated with this transaction.
41
Further,
in March 2008, we sold our EVAR program obtained in connection with our 2005
acquisition of TriVascular, Inc. for $30 million in cash. We discontinued our
EVAR program in 2006. In connection with the sale, we recorded a pre-tax gain of
$16 million ($36 million after-tax) during 2008.
During
2007, in connection with our strategic initiatives, we announced our intent to
sell the majority of our investment portfolio in order to monetize those
investments determined to be non-strategic. In June 2008, as part of our
initiative to monetize non-strategic investments, we signed separate definitive
agreements with Saints Capital and Paul Capital Partners to sell the majority of
our investments in, and notes receivable from, certain publicly traded and
privately held entities for gross proceeds of approximately $140 million. In
connection with these agreements, we received proceeds of $95 million during
2008. In addition, we received $54 million of proceeds from other transactions
to monetize certain other non-strategic investments and notes receivable. We
recorded net pre-tax losses of approximately $80 million during 2008 related to
these monetization initiatives and the write-down of certain non-strategic
investments. We expect to receive $45 million of remaining proceeds from the
Saints and Paul transactions during 2009, and do not expect to record
significant gains or losses in 2009 related to these definitive agreements.
Refer to our Other, net
discussion, as well as Note G – Investments and Notes
Receivable to our consolidated financial statements included in Item 8 of
this Annual Report for more information on our investment portfolio
activity.
Corporate Warning
Letter
In
January 2006, legacy Boston Scientific received a corporate warning letter from
the U.S. Food and Drug Administration (FDA) notifying us of serious regulatory
problems at three of our facilities and advising us that our corporate-wide
corrective action plan relating to three site-specific warning letters issued to
us in 2005 was inadequate. We have identified solutions to the quality system
issues cited by the FDA and have made significant progress in transitioning our
organization to implement those solutions. During 2008, the FDA reinspected a
number of our facilities and, in October 2008, informed us that our quality
system is now in substantial compliance with its Quality System Regulations. The
FDA has approved all of our requests for final approval of Class III product
submissions previously on hold due to the corporate warning letter and has
approved all currently eligible requests for Certificates to Foreign Governments
(CFGs). Since October 2008, we have received approval to market the following
new products in the U.S.:
|
•
|
our TAXUS® Express2®
Atom™ paclitaxel-eluting coronary stent system, designed for treating
small coronary vessels;
|
|
•
|
our
TAXUS® Liberté® paclitaxel-eluting coronary stent system, our
second-generation drug-eluting stent
system;
|
|
•
|
our
Carotid WALLSTENT® Monorail® Endoprosthesis, a less-invasive alternative
to surgery for treating carotid artery
disease;
|
|
•
|
our
Apex™ Percutaneous Transluminal Coronary Angioplasty
(PTCA) dilatation catheter, for treating the most challenging
atherosclerotic
lesions;
|
|
•
|
our
Express® SD Renal Monorail® stent system, the first low-profile,
pre-mounted stent approved in the U.S. for use in renal arteries;
and
|
|
•
|
our
Sterling™ Monorail®
and Over-the-Wire balloon dilatation catheter for use in the renal and
lower extremity
arteries.
|
The FDA
also approved the use of our TAXUS® Express2®
paclitaxel-eluting coronary stent system for the treatment of in-stent
restenosis1 (ISR) in bare-metal stents, the first ISR
approval granted by the FDA.
The
corporate warning letter remains in place pending final remediation of certain
Medical Device Report (MDR) filing issues, which we are actively working with
the FDA to resolve. This remediation has resulted and may continue to result in
incremental medical device and vigilance reporting, which could adversely impact
physician perception of our products.
1 In-stent restenosis is re-narrowing of
the vessel inside a stent.
42
Business
and Market Overview
Cardiac Rhythm
Management
We
estimate that the worldwide CRM market approximated $10.8 billion in 2008, as
compared to approximately $10.0 billion in 2007, and estimate that U.S. ICD
system sales represented approximately 40 percent of the worldwide CRM market in
both years. Worldwide CRM market growth rates over the past three years,
including the U.S. ICD market, have been below those experienced in prior years,
resulting primarily from previous industry field actions and from a lack of new
indications for use. In 2008, however, we began to see renewed growth of the
worldwide CRM market with steadily increasing implant volumes.
Net sales
of our CRM products represented approximately 28 percent of our consolidated net
sales for 2008 and 25 percent in 2007. The following are the components of our
worldwide CRM product sales:
|
(in
millions)
|
Year
Ended
December
31, 2008
|
Year
Ended
December
31, 2007
|
||||||||||||||||||||||
|
U.S.
|
International
|
Total
|
U.S.
|
International
|
Total
|
|||||||||||||||||||
|
ICD
systems
|
$ | 1,140 | $ | 541 | $ | 1,681 | $ | 1,053 | $ | 489 | $ | 1,542 | ||||||||||||
|
Pacemaker
systems
|
340 | 265 | 605 | 318 | 264 | 582 | ||||||||||||||||||
| $ | 1,480 | $ | 806 | $ | 2,286 | $ | 1,371 | $ | 753 | $ | 2,124 | |||||||||||||
Our U.S.
sales of CRM products in 2008 increased $109 million, or eight percent, as
compared to 2007. Our U.S. sales benefited from growth in the U.S.
CRM market and from the successful launch of our next-generation COGNIS® CRT-D
and TELIGEN® ICD systems, as well as the launches of our CONFIENT® ICD system, the
LIVIAN® CRT-D
system, and the ALTRUA™ family of pacemaker systems. We experienced ten
percent growth in U.S. CRM sales during each of the second, third and fourth
quarters of 2008, largely as a result of these new product
launches.
Our
international CRM product sales increased $53 million, or seven percent in 2008,
as compared to 2007, due primarily to an increase in the size of the
international ICD market. However, our net sales and market share in Japan have
been negatively impacted as we move to a direct sales model for our CRM products
in Japan and, until we fully implement this model, our net sales and market
share in Japan may continue to be negatively impacted.
During
2008, we received more than a dozen new CRM product approvals. We will continue
to execute on our product pipeline and expect to begin offering our LATITUDE®
Patient Management System in certain European countries in 2009. This
technology, which enables physicians to monitor device performance remotely
while patients are in their homes, is a key component of many of our implantable
device systems. We also plan to launch our next-generation pacemaker, the
INGENIO™ pacemaker system, in the U.S., our EMEA (Europe/Middle East/Africa)
region and certain Inter-Continental countries in the first half of 2011.
We believe that these launches position us for sustainable growth within the
worldwide CRM market.
Net sales
from our CRM products represent a significant source of our overall net sales.
Therefore, increases or decreases in net sales from our CRM products could have
a significant impact on our results of operations. While we believe that the
size of the CRM market will increase above existing levels, there can be no
assurance as to the timing or extent of this increase. We believe we are well
positioned within the CRM market; however, the following variables may impact
the size of the CRM market and/or our share of that market:
|
•
|
our
continued ability to improve the trust and confidence of the implanting
physician community, the referring physician community and prospective
patients in our
technology;
|
|
•
|
future product field
actions or new physician advisories by us or our
competitors;
|
43
|
•
|
our
ability to successfully launch next-generation products and
technology;
|
|
•
|
the
successful conclusion and positive outcomes of on-going clinical trials
that may provide opportunities to expand indications for
use;
|
|
•
|
variations in
clinical results, reliability or product performance of our and our
competitors’ products;
|
|
•
|
delayed or limited
regulatory approvals and unfavorable reimbursement
policies;
|
|
•
|
our
ability to retain key members of our sales force and other key
personnel;
|
|
•
|
new
competitive launches;
and
|
|
•
|
average selling
prices and the overall number of procedures
performed.
|
Coronary
Stents
The size
of the coronary stent market is driven primarily by the number of percutaneous
coronary intervention (PCI) procedures performed, as well as the percentage of
those that are actually stented; the number of devices used per procedure;
average drug-eluting stent selling prices; and the drug-eluting stent
penetration rate (a measure of the mix between bare-metal and drug-eluting
stents used across procedures). We estimate that the worldwide coronary stent
market approximated $5.0 billion in 2008 and 2007, and estimate that
drug-eluting stents represented approximately 80 percent of the dollar
value of worldwide coronary stent market sales in both years. Uncertainty
regarding the efficacy of drug-eluting stents, as well as the increased
perceived risk of late stent thrombosis2 following the use of drug-eluting stents,
contributed to a decline in the worldwide drug-eluting stent market size during
2006 and 2007. However, data addressing this risk and supporting the safety of
drug-eluting stent systems positively affected trends in the growth of the
drug-eluting stent market in 2008, as referring cardiologists regained
confidence in this technology.
Net sales
of our coronary stent systems represented approximately 23 percent of our
consolidated net sales for 2008 and 24 percent in 2007. We are the only company
in the industry to offer a two-drug platform strategy with our TAXUS®
paclitaxel-eluting stent system and the PROMUS® everolimus-eluting stent system.
The following are the components of our worldwide coronary stent system
sales:
|
(in
millions)
|
Year
Ended
December
31, 2008
|
Year
Ended
December
31, 2007
|
||||||||||||||||||||||
|
U.S.
|
International
|
Total
|
U.S.
|
International
|
Total
|
|||||||||||||||||||
|
TAXUS®
|
$ | 621 | $ | 697 | $ | 1,318 | $ | 1,006 | $ | 754 | $ | 1,760 | ||||||||||||
|
PROMUS®
|
212 | 104 | 316 | 28 | 28 | |||||||||||||||||||
|
Drug-eluting
|
833 | 801 | 1,634 | 1,006 | 782 | 1,788 | ||||||||||||||||||
|
Bare-metal
|
88 | 129 | 217 | 104 | 135 | 239 | ||||||||||||||||||
| $ | 921 | $ | 930 | $ | 1,851 | $ | 1,110 | $ | 917 | $ | 2,027 | |||||||||||||
During 2008, U.S. sales of our drug-eluting stent systems declined $173 million, or 17 percent, due primarily to an increase in competition following recent competitive launches. We believe that our average share of the
2 Late stent thrombosis is the formation
of a clot, or thrombus, within the stented area one year or more after
implantation of the stent.
44
U.S.
drug-eluting stent market declined to 46 percent during 2008, as compared to 55
percent in 2007. In addition, pricing pressure resulted in a
reduction in the average selling price of our TAXUS® stent system in the U.S. by
approximately five percent as compared to the prior year. However, increasing
penetration rates have had a positive effect on the size of the U.S.
drug-eluting stent market. Average drug-eluting stent penetration rates in the
U.S. were 68 percent during 2008 (exiting 2008 at 73 percent for the month of
December), as compared to 65 percent during 2007 (exiting 2007 at 62 percent for
the month of December). We believe this is a strong indicator that the recovery
of the U.S. drug-eluting stent market is continuing and the market is
strengthening. In addition, the launch of our TAXUS® Express2® Atom™
and TAXUS® Liberté® stent systems in the U.S. during the fourth quarter of 2008
had a positive effect on our market share. We believe that exiting 2008, we were
the market leader with 49 percent share of the U.S. drug-eluting stent market
for the month of December, and are well positioned entering 2009.
Our
international drug-eluting stent system sales increased $19 million, or two
percent, in 2008 as compared to 2007, due to a full year of drug-eluting stent
sales in Japan and growth in the size of the international drug-eluting stent
market as a result of increased PCI procedural volume and higher penetration
rates. In May of 2007, we launched our TAXUS® Express2® coronary
stent system in Japan, and, in
January 2009, we received approval from the Japanese Ministry of Health, Labor
and Welfare to market our second-generation TAXUS® Liberté® drug-eluting stent
system in Japan. We are planning to launch our TAXUS® Liberté® stent system in
Japan during the first quarter of 2009 and the PROMUS® everolimus-eluting
coronary stent system in the second half of 2009, subject to regulatory
approval.
In July
2008, Abbott launched its XIENCE V™ everolimus-eluting coronary stent system,
and, simultaneously, we launched the PROMUS® everolimus-eluting coronary stent
system, supplied to us by Abbott. As of the closing of Abbott’s acquisition of
Guidant’s vascular intervention and endovascular solutions businesses, we
obtained a perpetual license to use the intellectual property used
in Guidant’s drug-eluting stent system program purchased by Abbott. We
believe that being the only company to offer two distinct drug-eluting stent
platforms provides us a considerable advantage in the drug-eluting stent market
and has enabled us to sustain our worldwide leadership position. However, under
the terms of our supply arrangement with Abbott, the gross profit and operating
profit margin of a PROMUS® stent system is significantly lower than that of our
TAXUS® stent system. Our PROMUS® stent systems have operating profit margins
that approximate half of our TAXUS® stent system operating profit margin.
Therefore, if sales of our PROMUS® stent system continue to increase in relation
to our total drug-eluting stent system sales, our profit margins will continue
to decrease. Refer to our Gross Profit discussion for
more information on the impact this sales mix has had on our gross profit
margins. Further,
the price we pay Abbott for our supply of PROMUS® stent systems is determined by
our contracts with them. Our cost is based, in part, on previously
fixed estimates of Abbott’s manufacturing costs for PROMUS® stent systems and
third-party reports of our average selling price of PROMUS® stent systems.
Amounts paid pursuant to this pricing arrangement are subject to a retroactive
adjustment at pre-determined intervals based on Abbott’s actual costs to
manufacture these stent systems for us and our average selling price of PROMUS®
stent systems. During 2009, we may make a payment to or receive a payment from
Abbott based on the differences between their actual manufacturing costs and the
contractually stipulated manufacturing costs and differences between our actual
average selling price and third-party reports of our average selling price, in
each case, with respect to our purchases of PROMUS® stent systems from Abbott
during 2008, 2007 and 2006. As a result, during 2009, our profit margins on the
PROMUS® stent system may increase or decrease.
We are
reliant on Abbott for our supply of PROMUS® stent systems. Any production or
capacity issues that affect Abbott’s manufacturing capabilities or the process
for forecasting, ordering and receiving shipments may impact our ability to
increase or decrease the level of supply to us in a timely manner; therefore,
our supply of PROMUS® stent systems may not align with customer demand, which
could have an adverse effect on our operating results. At present, we
believe that our supply of PROMUS® stent systems from Abbott is sufficient to
meet customer demand. Further, our supply agreement with Abbott for PROMUS®
stent systems extends through the middle of the fourth quarter of 2009 in
Europe, and is currently being reviewed by the European Commission for possible
extension, and through the end of the second quarter of 2012 in the U.S. and
Japan. We are incurring incremental costs and expending incremental resources in
order to develop and commercialize an internally developed and manufactured
next-generation everolimus-eluting stent system. We expect that this stent
system, the PROMUS® Element™ stent system, will have gross profit margins more
comparable to our TAXUS® stent system and will improve our overall
45
gross
profit and operating profit margins once launched. We expect to launch PROMUS®
Element in our EMEA region and certain Inter-Continental countries in late
2009 and in the U.S. and Japan in mid-2012. We expect to launch our
first-generation PROMUS® everolimus-eluting coronary stent system during the
second half of 2009 in Japan. Our product pipeline also includes the TAXUS®
Element™ coronary stent system. We expect to launch our TAXUS® Element stent
system in EMEA and certain Inter-Continental countries during the fourth quarter
of 2009 and in the U.S. and Japan in mid-2011.
Historically,
the worldwide coronary stent market has 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 these
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.
We
believe that we can sustain our leadership position within the worldwide
drug-eluting stent market for a variety of reasons, including:
|
•
|
our
two drug-eluting stent platform
strategy;
|
|
•
|
the
broad and consistent long-term results of our TAXUS® clinical trials, and
the favorable results of the XIENCE V™/PROMUS®
stent system clinical trials to
date;
|
|
•
|
the
performance benefits of our current and future
technology;
|
|
•
|
the
strength of our pipeline of drug-eluting stent
products;
|
|
•
|
our
overall position in the worldwide interventional medicine market and our
experienced interventional cardiology sales force;
and
|
|
•
|
the
strength of our clinical, marketing and manufacturing
capabilities.
|
However,
a further decline in net sales from our drug-eluting stent systems could have a
significant adverse impact on our operating results and operating cash flows.
The most significant variables that may impact the size of the drug-eluting
stent market and our position within this market include:
|
•
|
our
ability to successfully launch next-generation products and technology
features;
|
|
•
|
physician and
patient confidence in our technology and attitudes toward drug-eluting
stents, including the continued abatement of prior concerns regarding the
risk of late stent
thrombosis;
|
|
•
|
changes in
drug-eluting stent penetration rates, the overall number of PCI procedures
performed, average number of stents used per procedure, and average
selling prices of drug-eluting stent
systems;
|
|
•
|
the
outcome of intellectual property
litigation;
|
|
•
|
variations in
clinical results or perceived product performance of our or our
competitors’ products;
|
|
•
|
delayed or limited
regulatory approvals and unfavorable reimbursement
policies;
|
|
•
|
our
ability to retain key members of our sales force and other key personnel;
and
|
|
•
|
changes in FDA
clinical trial data and post-market surveillance requirements and the
associated impact on new product launch schedules and the cost of product
approvals and
compliance.
|
46
There
continues to be significant intellectual property litigation in the coronary
stent market. We are currently involved in a number of legal proceedings with
certain of our existing competitors, including Johnson & Johnson, and other
independent patent holders. There can be no assurance that an adverse outcome in
one or more proceedings would not materially impact our ability to meet our
objectives in the coronary stent market, and our liquidity and results of
operations. We previously had several active lawsuits pending between us and
Medtronic, Inc. However, on January 23, 2009, we reached an agreement to stop
all litigation between us and Medtronic with respect to interventional
cardiology and endovascular repair cases. See Note L - Commitments and
Contingencies to our 2008 consolidated financial statements included
in Item 8 of this Annual Report for a description of these legal
proceedings.
Other
Businesses
Interventional
Cardiology (excluding coronary stent systems)
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; and ultrasound
and imaging systems. Our net sales of these products increased to $1.028
billion in 2008, as compared to $989 million in 2007, an increase of $39 million
or four percent. This increase was driven primarily by growth in our
ultrasound and imaging system franchise; including increased sales of our iLab®
Ultrasound Imaging System, which enhances the diagnosis and treatment of blocked
vessels and heart disorders. In addition, in November 2008, the FDA
approved our Apex™ PTCA dilatation catheter, used in treating atherosclerotic
lesions.
Peripheral
Interventions
Our
Peripheral Interventions business product offerings include stents, balloon
catheters, sheaths, wires and vena cava filters, which are used to diagnose and
treat peripheral vascular disease. Our 2008 net sales of these products
decreased slightly to $589 million in 2008, as compared to $597 million in
2007. The decrease was a result of U.S. sales declines of $34 million
in 2008 to $294 million, from $328 million in 2007, primarily as a result of
increased competition across most of the vascular interventional product
categories. Our international Peripheral Interventions business grew $26
million in 2008, as compared to 2007, due primarily to foreign currency
fluctuations. We continue to hold a strong worldwide position in the Peripheral
Interventions market and we are the market leader in multiple product
categories. Further, in the fourth quarter of 2008, we received FDA
approval for three new products: our Carotid WALLSTENT® Monorail®
Endoprosthesis for the treatment of patients with carotid artery disease who are
at high risk for surgery; our Express® SD Renal Monorail® premounted stent
system for use as an adjunct to percutaneous transluminal renal angioplasty in
certain lesions of the renal arteries; and our Sterling™ Monorail® and Over-the-Wire
balloon dilatation catheter for use in the renal and lower extremity
arteries.
Neurovascular
We market
a broad line of products used in treating diseases of the neurovascular system.
Our Neurovascular net sales increased to $360 million in 2008, as compared to
$352 million in 2007, an increase of $8 million or two percent. Our U.S. net
sales were $131 million in 2008, as compared to $127 million in 2007, and our
international net sales were $229 million in 2008, as compared to $225 million
in 2007. We plan to launch a next-generation family of detachable coils,
including an enhanced delivery system with reduced coil detachment times, in the
U.S. in the second half of 2009. Within our product pipeline, we are also
developing next-generation technologies for the treatment of aneurysms,
intracranial atherosclerotic disease and acute ischemic stroke, and are
involved in numerous clinical activities that are designed to expand the size of
the worldwide Neurovascular market.
47
Endosurgery
Our
Endosurgery group develops and manufactures devices to treat a variety of
medical conditions, including diseases of the digestive and pulmonary systems
within our Endoscopy division, and urological and gynecological disorders within
our Urology division. Our Endosurgery group net sales grew eight percent in 2008
to $1.374 billion, and accounted for 17 percent of our total net sales in 2008,
as compared to 15 percent in 2007. The following are the components
of our worldwide Endosurgery business:
|
(in
millions)
|
Year
Ended
December
31, 2008
|
Year
Ended
December
31, 2007
|
||||||||||||||||||||||
|
U.S.
|
International
|
Total
|
U.S.
|
International
|
Total
|
|||||||||||||||||||
|
Endoscopy
|
$ | 477 | $ | 466 | $ | 943 | $ | 453 | $ | 413 | $ | 866 | ||||||||||||
|
Urology
|
335 | 96 | 431 | 316 | 87 | 403 | ||||||||||||||||||
| $ | 812 | $ | 562 | $ | 1,374 | $ | 769 | $ | 500 | $ | 1,269 | |||||||||||||
Our Endoscopy net sales grew nine percent in 2008 to $943 million from $866 million in 2007. Key sales growth drivers within Endoscopy included our biliary franchise, which grew $45 million, or 16 percent, to $324 million on the strength of our SpyGlass® Direct Visualization System for single-operator duodenoscope assisted cholangiopancreatoscopy, or visual examination of the bile ducts, which was launched in the second quarter of 2007. In addition, our hemostasis franchise grew $16 million, or 18 percent, to $107 million on the strength of our Resolution® Clip Device, which is the only currently-marketed mechanical clip designed to open and close (up to five times) before deployment to enable a physician to see the effects of the clip before committing to deployment. Our Urology net sales grew seven percent in 2008 to $431 million from $403 million in 2007. This growth was primarily due to our pelvic floor franchise, which grew 17 percent, or $14 million, to $95 million, led by our line of sling-based devices and kits, which are used in the treatment of a variety of stress- and age-related disorders of the lower female anatomy. The remaining Urology growth was spread across the other components of our business, including our stone management and gynecology franchises. During 2009, we intend to launch a number of new products across multiple franchises in both our Endoscopy and Urology businesses.
Neuromodulation
Despite
new product launches during the year by both of our major competitors, our
Neuromodulation net sales increased to $245 million in 2008, as compared to $204
million in 2007, an increase of $41 million or 20 percent. Our U.S. net sales
were $234 million in 2008, as compared to $198 million in 2007, and our
international net sales were $11 million in 2008, as compared to $6 million in
2007. We continued to maintain our strong position within the U.S. market with
our Precision® Spinal Cord Stimulation (SCS) system, used for the treatment of
chronic pain of the lower back and legs. We believe that we continue to have a
technology advantage over our competitors with proprietary features such as
Multiple Independent Current Control, which allows the physician to target
specific areas of pain more precisely. In addition, we are currently
assessing the use of our SCS system to treat other sources of pain. These
factors, coupled with the move of our Neuromodulation business to a new
state-of-the-art facility during 2008, position us well for continued growth in
this market.
Innovation
Our
approach to innovation combines internally developed products and technologies
with those we obtain externally through strategic acquisitions and alliances.
Our research and development efforts are focused largely on the development of
next-generation and novel technology offerings across multiple programs and
48
divisions.
We expect to continue to invest in our CRM and drug-eluting stent technologies,
and will also invest selectively in areas outside of these markets. We expect to
continue to invest in our paclitaxel drug-eluting stent program, along with our
internally developed and manufactured everolimus-eluting stent program (the
PROMUS® Element™ stent system), to sustain our leadership position in the
worldwide drug-eluting stent market. There can be no assurance that these
technologies will achieve technological feasibility, obtain regulatory approvals
or gain market acceptance. A delay in the development or approval of these
technologies may adversely impact our future growth.
Our
strategic acquisitions are intended to expand further our ability to offer our
customers safe, effective, high-quality medical devices that satisfy their
interventional needs. Management believes it has developed a sound plan to
integrate acquired businesses. However, our failure to integrate these
businesses successfully could impair our ability to realize the strategic and
financial objectives of these transactions. Potential future acquisitions
may be dilutive to our earnings and may require additional debt or equity
financing, depending on their size and nature.
We have
entered strategic alliances with both publicly traded and privately held
companies. We enter these alliances to broaden our product technology portfolio
and to strengthen and expand our reach into existing and new markets. During
2008, we monetized certain investments and alliances no longer determined to be
strategic (see the Strategic
Initiatives section for more information). While we believe our remaining
strategic investments are within attractive markets with an outlook for
sustained growth, the full benefit of these alliances is highly dependent on the
strength of the other companies’ underlying technology and ability to execute.
An inability to achieve regulatory approvals and launch competitive product
offerings, or litigation related to these technologies, among other factors, may
prevent us from realizing the benefit of these strategic alliances.
Reimbursement and
Funding
Our
products are purchased principally by hospitals, physicians and other healthcare
providers worldwide that typically bill various third-party payors, such as
governmental programs (e.g., Medicare and Medicaid), private insurance plans and
managed-care programs for the healthcare services provided to their patients.
Third-party payors may provide or deny coverage for certain technologies and
associated procedures based on independently determined assessment criteria.
Reimbursement by third-party payors for these services is based on a wide range
of methodologies that may reflect the services’ assessed resource costs,
clinical outcomes and economic value. These reimbursement methodologies confer
different, and sometimes conflicting, levels of financial risk and incentives to
healthcare providers and patients, and these methodologies are subject to
frequent refinements. Third-party payors are also increasingly adjusting
reimbursement rates and challenging the prices charged for medical products and
services. There can be no assurance that our products will be automatically
covered by third-party payors, that reimbursement will be available or, if
available, that the third-party payors’ coverage policies will not adversely
affect our ability to sell our products profitably. Accordingly, the
outcome of these reimbursement decisions could have an adverse impact on our
business. In addition, the current economic climate may impose further
pressure on funds available for reimbursement of healthcare and on reimbursement
levels.
Manufacturing and Raw
Materials
We design
and manufacture the majority of our products in technology centers around the
world. Many components used in the manufacture of our products are readily
fabricated from commonly available raw materials or off-the-shelf items
available from multiple supply sources. Certain items are custom made to meet
our specifications. We believe that in most cases, redundant capacity exists at
our suppliers and that alternative sources of supply are available or could be
developed within a reasonable period of time. We also have an on-going program
to identify single-source components and to develop alternative back-up
supplies. However, in certain cases, we may not be able to quickly establish
additional or replacement suppliers for specific components or materials,
largely due to the regulatory approval system and the complex nature of our
manufacturing processes and those of our suppliers. A reduction or interruption
in supply, an inability to
49
develop
and validate alternative sources if required, or a significant increase in the
price of raw materials or components could adversely affect our operations and
financial condition, particularly materials or components related to our CRM
products and drug-eluting stent systems. In addition, our products require
sterilization prior to sale and we rely primarily on third party vendors to
perform this service. To the extent our third party sterilizers
are unable to process our products, whether due to raw
material, capacity, regulatory or other constraints, we may be unable
to transition to other providers in a timely manner, which could have an
adverse impact on our operations.
International
Markets
Our
profitability from our international operations may be limited by risks and
uncertainties related to economic conditions in these regions, currency
fluctuations, regulatory and reimbursement approvals, competitive offerings,
infrastructure development, rights to intellectual property and our ability to
implement our overall business strategy. Any significant changes in the
competitive, political, regulatory, reimbursement or economic environment where
we conduct international operations may have a material impact on our business,
financial condition or results of operations. International markets, including
Japan, are affected by economic pressure to contain reimbursement levels and
healthcare costs. Initiatives to limit the growth of healthcare costs, including
price regulation, are under way in many countries in which we do business.
Implementation of cost containment initiatives and healthcare reforms in
significant markets such as Japan, Europe and other international markets may
limit the price of, or the level at which reimbursement is provided for, our
products and may influence a physician’s selection of products used to treat
patients. We expect these practices to put increased pressure on reimbursement
rates in these markets.
In
addition, most international jurisdictions have adopted regulatory approval and
periodic renewal requirements for medical devices, and we must comply with these
requirements in order to market our products in these jurisdictions. Further,
some emerging markets rely on the FDA’s CFGs in lieu of their own regulatory
approval requirements. Although the corporate warning letter has not been
formally resolved, the FDA has approved all currently eligible requests for
CFGs. However, any limits on our ability to market our full line of existing
products and to launch new products within these jurisdictions could have an
adverse impact on our business.
Results
of Operations
Net
Sales
The
following table provides our worldwide net sales by region and the relative
change on an as reported and constant currency basis:
|
2008
versus 2007
|
2007
versus 2006
|
|||||||||||||||||||||||||||
|
(in
millions)
|
2008
|
2007
|
2006
|
As
Reported Currency
Basis
|
Constant
Currency
Basis
|
As
Reported Currency
Basis
|
Constant
Currency
Basis
|
|||||||||||||||||||||
|
United
States
|
$ | 4,487 | $ | 4,522 | $ | 4,415 | (1 | ) % | (1 | ) % | 2 | % | 2 | % | ||||||||||||||
|
EMEA
|
1,960 | 1,833 | 1,631 | 7 | % | 2 | % | 12 | % | 3 | % | |||||||||||||||||
|
Inter-Continental
|
1,534 | 1,449 | 1,299 | 6 | % | (2 | ) % | 12 | % | 9 | % | |||||||||||||||||
|
International
|
3,494 | 3,282 | 2,930 | 6 | % | - | % | 12 | % | 6 | % | |||||||||||||||||
|
Subtotal
|
7,981 | 7,804 | 7,345 | 2 | % | - | % | 6 | % | 4 | % | |||||||||||||||||
|
Divested
businesses
|
69 | 553 | 476 | N/A | N/A | N/A | N/A | |||||||||||||||||||||
|
Worldwide
|
$ | 8,050 | $ | 8,357 | $ | 7,821 | (4 | ) % | (6 | ) % | 7 | % | 5 | % | ||||||||||||||
The
following table provides our worldwide net sales by division and the relative
change on an as reported basis:
50
|
2008
versus 2007
|
2007
versus 2006
|
|||||||||||||||||||||||||||
|
(in
millions)
|
2008
|
2007
|
2006
|
As
Reported
Currency
Basis
|
Constant
Currency
Basis
|
As
Reported
Currency
Basis
|
Constant
Currency
Basis
|
|||||||||||||||||||||
|
Interventional
Cardiology
|
$ | 2,879 | $ | 3,016 | $ | 3,509 | (5 | ) % | (7 | ) % | (14 | ) % | (15 | ) % | ||||||||||||||
|
Peripheral
Interventions
|
589 | 597 | 624 | (1 | ) % | (5 | ) % | (4 | ) % | (8 | ) % | |||||||||||||||||
|
Cardiovascular
|
3,468 | 3,613 | 4,133 | (4 | ) % | (7 | ) % | (13 | ) % | (14 | ) % | |||||||||||||||||
|
Cardiac
Rhythm Management
|
2,286 | 2,124 | 1,371 | 8 | % | 5 | % | 55 | % | 51 | % | |||||||||||||||||
|
Electrophysiology
|
153 | 147 | 134 | 4 | % | 2 | % | 10 | % | 8 | % | |||||||||||||||||
|
Cardiac
Rhythm Management
|
2,439 | 2,271 | 1,505 | 7 | % | 5 | % | 51 | % | 47 | % | |||||||||||||||||
|
Neurovascular
|
360 | 352 | 326 | 2 | % | (2 | ) % | 8 | % | 4 | % | |||||||||||||||||
|
Peripheral
Embolization
|
95 | 95 | 87 | 1 | % | (4 | ) % | 9 | % | 7 | % | |||||||||||||||||
|
Neurovascular
|
455 | 447 | 413 | 2 | % | (3 | ) % | 8 | % | 5 | % | |||||||||||||||||
|
Cardiovascular
Group
|
6,362 | 6,331 | 6,051 | - | % | 1 | % | 5 | % | 2 | % | |||||||||||||||||
|
Endoscopy
|
943 | 866 | 777 | 9 | % | 6 | % | 11 | % | 9 | % | |||||||||||||||||
|
Urology
|
431 | 403 | 371 | 7 | % | 6 | % | 9 | % | 8 | % | |||||||||||||||||
|
Endosurgery
Group
|
1,374 | 1,269 | 1,148 | 8 | % | 6 | % | 11 | % | 8 | % | |||||||||||||||||
|
Neuromodulation
|
245 | 204 | 146 | 20 | % | 20 | % | 40 | % | 40 | % | |||||||||||||||||
|
Subtotal
|
7,981 | 7,804 | 7,345 | 2 | % | - | % | 6 | % | 4 | % | |||||||||||||||||
|
Divested
businesses
|
69 | 553 | 476 | N/A | N/A | N/A | N/A | |||||||||||||||||||||
|
Worldwide
|
$ | 8,050 | $ | 8,357 | $ | 7,821 | (4 | ) % | (6 | ) % | 7 | % | 5 | % | ||||||||||||||
U.S.
Net Sales
Our U.S.
net sales, excluding sales from divested businesses, decreased $35 million,
or one percent in 2008, as compared to 2007. The decrease was due primarily to a
decrease in Cardiovascular division sales of $222 million, driven primarily by
declines in sales of our drug-eluting stent systems due to increased
competition. Partially offsetting this decrease was an increase in CRM product
sales of $109 million, as a result of numerous successful product launches
during the year. In addition, U.S. sales in our Endosurgery division grew
$43 million in 2008, as compared to 2007, driven by strength in our biliary and
hemostasis franchises, and our Neuromodulation division increased sales by $36
million, due to market growth and continued physician adoption of our Precision
Plus™ spinal cord stimulation technology. Refer to the Business and Market Overview
section for a more detailed discussion of our net sales by
division.
Our U.S.
net sales, excluding sales from divested businesses, increased $107 million, or
two percent, in 2007, as compared to 2006. The increase related primarily to an
increase in U.S. CRM product sales of approximately $450 million due to a full
year of consolidated operations in 2007. In addition, we achieved year-over-year
U.S. sales growth of approximately $60 million in our Endosurgery businesses and
$65 million in our Neuromodulation business. Offsetting these increases was a
decline in our U.S. Cardiovascular division sales of approximately $500 million,
driven primarily by lower sales of our TAXUS® drug-eluting stent system as a
result of a decrease in the size of the U.S. drug-eluting stent market. This
decrease was driven principally by declines in drug-eluting stent penetration
rates resulting from on-going concerns regarding the safety and efficacy of
drug-eluting stents.
51
International
Net Sales
Our
international net sales, excluding sales from divested businesses, increased
$212 million, or six percent, in 2008, as compared to 2007. The increase
was attributable primarily to the favorable impact of currency exchange rates,
which contributed $208 million to our international net sales, excluding sales
from divested businesses. Within our international business, sales in our
Cardiovascular division increased $77 million and CRM product sales increased
$53 million. In addition, sales in our Endosurgery franchises increased $63
million in 2008, as compared to 2007. Refer to the Business and Market Overview
section for a more detailed discussion of our net sales by
division.
Our
international net sales, excluding sales from divested businesses, increased
$352 million, or 12 percent, in 2007 as compared to 2006. Approximately $170
million was attributable to the favorable impact of currency exchange rates.
Within our international business, sales of our CRM products increased $290
million, due primarily to a full year of consolidated results in 2007. Sales in
our Cardiovascular division increased $50 million, due primarily to the May 2007
launch of our TAXUS® Express2® coronary
stent system in Japan.
Gross
Profit
In 2008,
our gross profit was $5.581 billion, as compared to $6.015 billion in 2007, a
decrease of $434 million or seven percent. As a percentage of net sales, our
gross profit decreased to 69.3 percent for 2008, as compared to 72.0 percent for
2007. For 2007, our gross profit was $6.015 billion, as compared to $5.614
billion for 2006. As a percentage of net sales, our gross profit increased
slightly to 72.0 percent in 2007, as compared to 71.8 percent in 2006. The
following is a reconciliation of our gross profit percentages from 2006 to 2007
and 2007 to 2008:
|
Year
Ended
|
|||||||||
|
December
31,
|
|||||||||
|
2008
|
2007
|
||||||||
|
Gross
profit - prior year
|
72.0 | % | 71.8 | % | |||||
|
Shifts
in product sales mix
|
(2.5 | ) % | (1.8 | ) % | |||||
|
Lower
Project Horizion spend
|
0.7 | % | 0.2 | % | |||||
|
Impact
of higher inventory charges and other period expenses
|
(0.5 | ) % | (1.0 | ) % | |||||
|
Inventory
step up charge in 2006
|
3.4 | % | |||||||
|
All
other
|
(0.4 | ) % | (0.6 | ) % | |||||
|
Gross
profit - current year
|
69.3 | % | 72.0 | % | |||||
Our gross
profit margin was also negatively impacted by higher inventory charges and other
period expenses during both years. In 2008, these charges consisted primarily of
a $23 million inventory write-off related to an FDA warning letter received by
one of our third party sterilizers, and approximately $20 million of CRM-related
inventory write-offs, resulting principally from the successful launch of
COGNIS® and TELIGEN®. In 2007, these charges included warranty-related and other
scrap charges.
Partially
offsetting these declines in our gross profit margin was lower spending
associated with Project Horizon, our corporate-wide initiative to improve and
harmonize our overall quality processes and systems, which ended as a formal
program as of December 31, 2007. In addition, included in cost of
products sold for 2006 was an adjustment of $267 million, representing the
step-up value of acquired Guidant inventory sold
52
during
the year. There were no amounts included in our 2007 or 2008 cost of
products sold related to the inventory step-up and, as of December 31, 2007, we
had no step-up value remaining in inventory.
Operating
Expenses
The
following table provides a summary of certain of our operating
expenses:
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
(in
millions)
|
$
|
%
of Net
Sales
|
$
|
%
of Net
Sales
|
$
|
%
of Net
Sales
|
||||||||||||||||||
|
Selling,
general and administrative expenses
|
2,589 | 32.2 | 2,909 | 34.8 | 2,675 | 34.2 | ||||||||||||||||||
|
Research
and development expenses
|
1,006 | 12.5 | 1,091 | 13.1 | 1,008 | 12.9 | ||||||||||||||||||
|
Royalty
expense
|
203 | 2.5 | 202 | 2.4 | 231 | 3.0 | ||||||||||||||||||
|
Amortization
expense
|
543 | 6.7 | 620 | 7.4 | 474 | 6.1 | ||||||||||||||||||
Selling, General and Administrative (SG&A) Expenses
In 2008,
our SG&A expenses decreased by $320 million, or 11 percent, as compared to
2007. As a percentage of our net sales, SG&A expenses decreased to 32.2
percent in 2008 from 34.8 percent in 2007. The decrease in our SG&A expenses
related primarily to lower head count and spending resulting from our expense
and head count reduction plan, as well as a reduction of $160 million
attributable to our first quarter 2008 divestiture of certain non-strategic
businesses. Refer to the Strategic Initiatives section
for more discussion of these initiatives.
In 2007,
our SG&A expenses increased by $234 million, or nine percent, as compared to
2006. As a percentage of our net sales, SG&A expenses increased slightly to
34.8 percent in 2007 from 34.2 percent in 2006. The increase in our SG&A
expenses related primarily to $256 million in incremental SG&A expenditures
associated with a full year of consolidated CRM operations, offset partially by
lower head count and spending as a result of our expense and head count
reduction plan, which was initiated in the fourth quarter of 2007.
Research
and Development (R&D) Expenses
Our
investment in R&D reflects spending on new product development programs, as
well as regulatory compliance and clinical research. In 2008, our R&D
expenses decreased by $85 million, or eight percent, as compared to
2007. As a percentage of our net sales, R&D expenses decreased to
12.5 percent in 2008 from 13.1 percent in 2007. The decrease related
primarily to lower head count and spending of $75 million resulting from our
first quarter 2008 divestiture of certain non-strategic businesses. We remain
committed to advancing medical technologies and investing in meaningful research
and development projects in all of our businesses in order to maintain a healthy
pipeline of new products that will contribute to our short- and long-term
profitable sales growth.
In 2007,
our R&D expenses increased by $83 million, or 8 percent, as
compared to 2006. As a percentage of our net sales, R&D expenses increased
marginally to 13.1 percent in 2007 from 12.9 percent in 2006. The
increase related primarily to $131 million in incremental R&D expenditures
associated with a full year of consolidated CRM operations, offset partially by lower spending of approximately $37 million associated with the
cancellation of our Endovations™ single-use endoscope R&D
program. During the second quarter of 2007, we determined that our
Endovations system would not be a commercially viable product and terminated the
program. In addition, our 2006 R&D expenses included approximately $30
million in costs related to the cancellation of the TriVascular AAA stent-graft
program. We do not expect these program cancellations to materially impact our
future operations or cash flows.
53
Royalty
Expense
In 2008,
our royalty expense increased by $1 million, or less than one percent, as
compared to 2007. As a percentage of our net sales, royalty expense increased
slightly to 2.5 percent from 2.4 percent for 2007. Royalty expense attributable
to sales of our drug-eluting stent systems increased $8 million as compared to
2007, despite an overall decrease in drug-eluting stent system sales. This was
due to a shift in the mix of our drug-eluting stent system sales towards the
PROMUS® stent system, following its launch in 2008. The royalty rate applied to
sales of the PROMUS® stent system is, on average, higher than that associated
with sales of our TAXUS® stent system. Offsetting this increase was a decrease
in royalty expense of $6 million attributable to our first quarter 2008
divestiture of certain non-strategic businesses.
In 2007,
our royalty expense decreased by $29 million, or 13 percent, as compared to
2006, due primarily to lower sales of our TAXUS® drug-eluting stent system. As a
percentage of our net sales, royalty expense decreased to 2.4 percent from 3.0
percent for 2006. Royalty expense attributable to sales of our TAXUS® stent
system decreased $48 million as compared to 2006, due to a decrease in TAXUS®
stent system sales. Offsetting this decrease was an increase in royalty expense
attributable to Guidant-related products of $13 million, due to a full year of
consolidated results, as well as increases in royalties associated with our
other businesses.
Amortization
Expense
In 2008,
our amortization expense decreased by $77 million, or 12 percent, as compared to
2007. The decrease in our amortization expense related primarily to the disposal
of $581 million of amortizable intangible assets in connection with our first
quarter 2008 business divestitures, and to certain Interventional
Cardiology-related intangible assets reaching the end of their accounting useful
life during 2008.
In 2007,
our amortization expense increased by $146 million, or 31 percent, as compared
to 2006. The increase in our amortization expense related to incremental
amortization associated with intangible assets obtained as part of the Guidant
acquisition, due to a full year of amortization.
Goodwill
and Intangible Asset Impairment Charges
In 2008,
we recorded goodwill and intangible asset impairment charges of $2.790 billion,
including a $2.613 billion write-down of goodwill associated with our
acquisition of Guidant, a $131 million write-down of certain of our Peripheral
Interventions-related intangible assets, and a $46 million write-down of certain
Urology-related intangible assets. We do not believe that the write-down of
these assets will have a material impact on future operations or cash
flows. Refer
to Note E –Goodwill and Other
Intangible Assets to our 2008 consolidated financial statements included
in Item 8 of this Annual Report for more information.
In 2007,
we recorded intangible asset impairment charges of $21 million associated with
our acquisition of Advanced Stent Technologies (AST), due to our decision to
suspend further significant funding of R&D with respect to the Petal™
bifurcation stent. We do not
expect this decision to materially impact our future operations or cash
flows.
In 2006,
we recorded intangible asset impairment charges of $23 million attributable to
the cancellation of the AAA stent-graft program we acquired with TriVascular,
Inc. In addition, we recorded intangible asset write-offs of $21 million
associated with developed technology obtained as part of our 2005 acquisition of
Rubicon Medical Corporation, and $12 million associated with our Real-time
Position Management® System (RPM)™ technology, due to our decision to cease
investment in these technologies. We do not expect these decisions to materially
impact our future operations or cash flows.
Acquisition-related
Milestone
In
connection with Abbott‘s 2006 acquisition of Guidant’s vascular intervention and
endovascular solutions businesses, Abbott agreed to pay us a milestone payment
of $250 million upon receipt of FDA approval to sell an everolimus-eluting stent
in the U.S. In July 2008, Abbott received FDA approval and launched its
54
XIENCE V™
everolimus-eluting coronary stent system in the U.S., and paid us $250 million,
which we recorded as a gain in the accompanying consolidated statements of
operations. Under the terms of the agreement, we are entitled to receive a
second milestone payment of $250 million from Abbott upon receipt of an approval
from the Japanese Ministry of Health, Labor and Welfare to market the
XIENCE V™ stent system in Japan.
Purchased
Research and Development
In 2008,
we recorded $43 million of purchased research and development charges, including
$17 million associated with our acquisition of Labcoat, Ltd., $8 million
attributable to our acquisition of CryoCor, Inc., and $18 million associated
with entering certain licensing and development arrangements.
The $17
million of in-process research and development associated with our acquisition
of Labcoat, Ltd. relates to a novel technology Labcoat is developing for coating
drug-eluting stents. We intend to use this technology in future generations of
our drug-eluting stent products. The $8 million of in-process research and
development associated with CryoCor represents cryogenic technology for use in
the treatment of atrial fibrillation, the most common and difficult to treat
cardiac arrhythmia (abnormal heartbeat). We intend to use this technology
in order to further pursue therapeutic solutions for atrial fibrillation and
advance our existing CRM and Electrophysiology product lines.
In 2007,
we recorded $85 million of purchased research and development, including $75
million associated with our acquisition of Remon Medical Technologies, Inc., $13
million resulting from the application of equity method accounting for one of
our strategic investments, and $12 million associated with payments made for
certain early-stage CRM technologies. Additionally, in June 2007, we terminated
our product development agreement with Aspect Medical Systems relating to brain
monitoring technology that Aspect was developing to aid the diagnosis and
treatment of depression, Alzheimer’s disease and other neurological conditions.
As a result, we recognized a credit to purchased research and development of
approximately $15 million during 2007, representing future payments that we
would have been obligated to make prior to the termination of the agreement. We
do not expect the termination of the agreement to impact our future operations
or cash flows materially.
The $75
million of in-process research and development acquired with Remon consists of a
pressure-sensing system development project, which we intend to combine with our
existing CRM devices. As of December 31, 2008, we estimate that the total cost
to complete the development project is between $75 million and $80 million. We
expect to launch devices using pressure-sensing technology in 2012 in our EMEA
region and certain Inter-Continental countries, in the U.S. in 2015, and Japan
in 2016, subject to regulatory approvals. We expect material net cash inflows
from such products to commence in 2015, following the launch of this technology
in the U.S.
In 2006,
we recorded $4.119 billion of purchased research and development, including a
charge of approximately $4.169 billion associated with the in-process research
and development obtained in conjunction with the Guidant acquisition; a credit
of $67 million resulting primarily from the reversal of accrued contingent
payments due to the cancellation of the TriVascular AAA program; and an expense
of $17 million resulting primarily from the application of equity method
accounting for one of our investments.
The
$4.169 billion of purchased research and development associated with the Guidant
acquisition consists primarily of approximately $3.26 billion for acquired
CRM-related in-process technology and $540 million for drug-eluting stent
technology shared with Abbott. The purchased research and development value
associated with the Guidant acquisition also includes $369 million representing
the estimated fair value of the potential milestone payments of up to $500
million that we may receive from Abbott upon their receipt of regulatory
approvals for certain products. We recorded the amounts as purchased research
and development at the acquisition date because the receipt of the payments was
dependent on future research and development activity and regulatory approvals,
and the asset had no alternative future use as of the acquisition date. In 2008,
Abbott received FDA approval and launched its XIENCE V™ everolimus-eluting
55
coronary
stent system in the U.S., and paid us $250 million, which we recognized as a
gain in our consolidated financial statements. Under the terms of the agreement,
we are entitled to receive a second milestone payment of $250 million from
Abbott upon receipt of an approval from the Japanese Ministry of Health, Labor
and Welfare to market the XIENCE V™ stent system in Japan. If received, we
will record this receipt as a gain in our consolidated financial statements at
the time of receipt.
The most
significant in-process purchased research and development projects acquired from
Guidant included the next-generation CRM pulse generator platform and rights to
the everolimus-eluting stent technology that we share with Abbott. The
next-generation pulse generator platform incorporates new components and
software while leveraging certain existing intellectual property, technology,
manufacturing know-how and institutional knowledge of Guidant. We expect to
leverage this platform across all CRM product families, including ICD systems,
cardiac resynchronization therapy (CRT) devices and pacemaker systems to treat
electrical dysfunction in the heart. During 2008, we substantially completed the
in-process CRM pulse generator project with the regulatory approval and launch
of the COGNIS® CRT-D and TELIGEN® ICD devices in the U.S., EMEA, and certain
Inter-Continental countries. We expect to launch the INGENIO™ pacemaker system,
utilizing this platform in both EMEA and the U.S. in the first half of 2011. As
of December 31, 2008, we estimate that the total cost to complete the INGENIO™
technology is between $30 million and $35 million and expect material net cash
inflows from the INGENIO™ device to commence in the second half of
2011.
The $540
million attributable to everolimus-eluting stent technology represents the
estimated fair value of the rights to Guidant’s everolimus-based drug-eluting
stent technology we share with Abbott. In December 2006, we launched the PROMUS®
everolimus-eluting coronary stent system, supplied to us by Abbott, in certain
EMEA countries. In 2007, we expanded our launch in EMEA, as well as certain
Inter-Continental countries and, in July 2008, launched in the U.S. We expect to
launch an internally developed and manufactured next-generation everolimus-based
stent, our PROMUS® Element™ stent system, in Europe in late 2009 and in the U.S.
and Japan in mid-2012. We expect that net cash inflows from our internally
developed and manufactured everolimus-based drug-eluting stent will commence in
2010. As of December 31, 2008, we estimate that the cost to complete our
internally manufactured next-generation everolimus-eluting stent technology
project is between $150 million and $175 million.
Gain
on Divestitures
During
2008, we recorded a $250 million gain in connection with the sale of our Fluid
Management and Venous Access businesses and our TriVascular EVAR program. Refer
to the Strategic Initiatives
section and Note F –
Divestitures and Assets Held for Sale to our 2008 consolidated
financial statements included in Item 8 of this Annual Report for more
information on these transactions.
Loss
on Assets Held for Sale
During
2007, we recorded a $560 million loss attributable primarily to the write-down
of goodwill in connection with the sale of certain of our non-strategic
businesses. Refer to the Strategic Initiatives section
and Note F – Divestitures and
Assets Held for Sale to our 2008 consolidated financial statements
included in Item 8 of this Annual Report for more information on these
transactions.
Restructuring
In
October 2007, our Board of Directors approved, and we committed to, an expense
and head count reduction plan, which resulted in the elimination of
approximately 2,300 positions worldwide. We are
56
providing
affected employees with severance packages, outplacement services and other
appropriate assistance and support. The plan is intended to bring
expenses in line with revenues as part of our initiatives to enhance short-
and long-term shareholder value. Key activities under the plan include the
restructuring of several businesses, corporate functions and product franchises
in order to better utilize resources, strengthen competitive positions, and
create a more simplified and efficient business model; the elimination,
suspension or reduction of spending on certain R&D projects; and the
transfer of certain production lines from one facility to another. We initiated
these activities in the fourth quarter of 2007 and expect to be substantially
complete worldwide in 2010.
We expect
that the execution of this plan will result in total pre-tax expenses of
approximately $425 million to $450 million. We are recording a
portion of these expenses as restructuring charges and the remaining portion
through other lines within our consolidated statements of operations. We
expect the plan to result in cash payments of approximately $395 million to $415
million. The following provides a summary of our expected total costs
associated with the plan by major type of cost:
|
Type
of cost
|
Total
estimated amount expected to be incurred
|
|
Restructuring
charges:
|
|
|
Termination
benefits
|
$225
million to $230 million
|
|
Fixed
asset write-offs
|
$20
million
|
|
Other
(1)
|
$65
million to $70 million
|
|
Restructuring-related
expenses:
|
|
|
Retention
incentives
|
$75
million to $80 million
|
|
Accelerated
depreciation
|
$10
million to $15 million
|
|
Transfer
costs (2)
|
$30
million to $35 million
|
|
$425
million to $450 million
|
|
|
|
(1)
|
Consists
primarily of consulting fees and contractual
cancellations.
|
|
|
(2)
|
Consists
primarily of costs to transfer product lines from one facility to another,
including costs of transfer teams, freight and product line
validations.
|
During
2008, we recorded $78 million of restructuring charges. In addition,
we recorded $55 million of expenses within other lines of our consolidated
statements of operations related to our restructuring initiatives. The following
presents these costs by major type and line item within our consolidated
statements of operations:
|
(in
millions)
|
Termination
Benefits
|
Retention
Incentives
|
Asset
Write-offs
|
Accelerated
Depreciation
|
Transfer
Costs
|
Other
|
Total
|
|||||||||||||||||||||
|
Restructuring
charges
|
$ | 34 | $ | 10 | $ | 34 | $ | 78 | ||||||||||||||||||||
|
Restructuring-related
expenses:
|
||||||||||||||||||||||||||||
|
Cost
of products sold
|
$ | 9 | $ | 4 | $ | 4 | 17 | |||||||||||||||||||||
|
Selling,
general and administrative expenses
|
27 | 4 | 31 | |||||||||||||||||||||||||
|
Research
and development expenses
|
7 | 7 | ||||||||||||||||||||||||||
| 43 | 8 | 4 | 55 | |||||||||||||||||||||||||
| $ | 34 | $ | 43 | $ | 10 | $ | 8 | $ | 4 | $ | 34 | $ | 133 | |||||||||||||||
During 2007, we recorded $176 million of restructuring charges, and $8 million of restructuring-related expenses within other lines of our consolidated statements of operations. The following presents these costs by major type and line item within our consolidated statements of operations:
57
|
(in
millions)
|
Termination
Benefits
|
Retention
Incentives
|
Asset
Write-offs
|
Accelerated
Depreciation
|
Transfer
Costs
|
Other
|
Total
|
|||||||||||||||||||||
|
Restructuring
charges
|
$ | 158 | $ | 8 | $ | 10 | $ | 176 | ||||||||||||||||||||
|
Restructuring-related
expenses:
|
||||||||||||||||||||||||||||
|
Cost
of products sold
|
$ | 1 | $ | 1 | 2 | |||||||||||||||||||||||
|
Selling,
general and administrative expenses
|
2 | $ | 2 | 4 | ||||||||||||||||||||||||
|
Research
and development expenses
|
2 | 2 | ||||||||||||||||||||||||||
| 5 | 3 | 8 | ||||||||||||||||||||||||||
| $ | 158 | $ | 5 | $ | 8 | $ | 3 | $ | 10 | $ | 184 | |||||||||||||||||
The
termination benefits recorded during 2008 and 2007 represent amounts incurred
pursuant to our on-going benefit arrangements and amounts for “one-time”
involuntary termination benefits, and have been recorded in accordance with
Financial Accounting Standards Board (FASB) Statement No. 112, Employer’s Accounting for
Postemployment Benefits and FASB Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. We expect to record the additional
termination benefits in 2009 when we identify with more specificity the job
classifications, functions and locations of the remaining head count to be
eliminated. Retention incentives represent cash incentives, which are
being recorded over the future service period during which eligible employees
must remain employed with us in order to retain the payment. The
other restructuring costs, which, in 2008 and 2007, represented primarily
consulting fees, are being recognized and measured at their fair value in the
period in which the liability is incurred in accordance with FASB Statement No.
146.
We have
incurred cumulative restructuring and restructuring-related costs of $317
million since we committed to the plan in October 2007. The following presents
these costs by major type (in millions):
|
Termination
benefits
|
$ | 192 | ||
|
Retention
incentives
|
48 | |||
|
Fixed
asset write-offs
|
18 | |||
|
Accelerated
depreciation
|
11 | |||
|
Transfer
costs
|
4 | |||
|
Other
|
44 | |||
| $ | 317 |
In 2008,
we made cash payments of approximately $185 million associated with our
restructuring initiatives, which related to termination benefits and retention
incentives paid and other restructuring charges. We have made
cumulative cash payments of approximately $230 million since we committed to our
restructuring initiatives in October 2007. These payments were made using cash
generated from our operations. We expect to record the remaining
costs associated with these restructuring initiatives during 2009 and make the
remaining cash payments throughout 2009 and 2010 using cash generated from
operations.
As a
result of our restructuring- and divestiture-related initiatives, we have
reduced our R&D and SG&A expenses by an annualized run rate of
approximately $500 million exiting 2008. In addition, we expect annualized
run-rate reductions of manufacturing costs of approximately $35 million to $40
million, as a result of our transfers of production lines. Due to the
longer-term nature of these initiatives, we do not expect to achieve the full
benefit of these reductions in manufacturing costs until 2012. We have partially
reinvested our savings from our head count reductions into targeted head count
increases of 500 positions, primarily in direct sales, to drive sales
growth.
Plant Network
Optimization
On
January 27, 2009, our Board of Directors approved, and we committed to, a plant
network optimization plan, which is intended to simplify our manufacturing plant
structure by transferring certain production lines from one facility to another
and by closing certain facilities. The plan is a complement to our previously
58
announced
expense and head count reduction plan, and is intended to improve overall gross
profit margins. Activities under the plan will be initiated in 2009 and are
expected to be substantially completed by the end of 2011. We estimate that the
plan will result in annual reductions of manufacturing costs of approximately
$65 million to $80 million in 2012. These savings are in addition
to the estimated $35 million to $40 million of annual reductions of
manufacturing costs in 2012 from activities under our previously announced
expense and head count reduction plan.
We
estimate that the plan will result in total pre-tax charges of approximately
$135 million to $150 million, and that approximately $120 million to $130
million of these charges will result in future cash outlays. The
following provides a summary of our estimates of costs associated with the plan
by major type of cost:
|
Type
of cost
|
Total
estimated amount expected to be incurred
|
|
Restructuring
charges:
|
|
|
Termination
benefits
|
$45
million to $50 million
|
|
Restructuring-related
expenses:
|
|
|
Accelerated
depreciation
|
$15
million to $20 million
|
|
Transfer
costs (1)
|
$75
million to $80 million
|
|
$135
million to $150 million
|
|
|
(1)
|
Consists
primarily of costs to transfer product lines from one facility to another,
including costs of transfer teams, freight and product line
validations.
|
The
estimated restructuring charges relate primarily to termination benefits to be
recorded pursuant to FASB Statement No. 112, Employer’s Accounting for
Postemployment Benefits and FASB Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. The accelerated depreciation will be
recorded through cost of products sold over the new remaining useful life of the
related assets and the production line transfer costs will be recorded through
cost of products sold as incurred.
Litigation-Related
Charges
In 2008,
we recorded a charge of $334 million as a result of a ruling by a federal judge
in a patent infringement case brought against us by Johnson & Johnson. In
2007, we recorded a charge of $365 million associated with this case. See
further discussion of our material legal proceedings in Item 3. Legal Proceedings and
Note L — Commitments and
Contingencies to our 2008 consolidated financial statements included in
Item 8 of this Annual Report.
Interest
Expense
Our
interest expense decreased to $468 million in 2008 as compared to $570 million
in 2007. The decrease in our interest expense related primarily to a decrease in
our average debt levels, due to debt prepayments of $1.425 billion during the
year, as well as a decrease in our average borrowing rate.
Our
interest expense increased to $570 million in 2007 as compared to $435 million
in 2006. The increase in our interest expense related primarily to an increase
in our average debt levels, as well as an increase in our average borrowing
rate. Our average debt levels for 2007 increased compared to 2006 as a result of
carrying a full year of incremental debt due to the acquisition of Guidant in
April 2006.
Fair Value
Adjustment
We
recorded net expense of $8 million in 2007 and $95 million in 2006 to reflect
the change in fair value related to the sharing of proceeds feature of the
Abbott stock purchase, which is discussed in further detail in Note D - Acquisitions
to our 2008 consolidated financial statements included in Item 8 of
this Annual Report.
59
This
sharing of proceeds feature was marked-to-market through earnings based upon
changes in our stock price, among other factors. There was no fair value
associated with this feature as of December 31, 2007.
Other,
net
Our
other, net reflected expense of $58 million in 2008, income of $23 million in
2007, and expense of $56 million in 2006. The following are the components of
other, net:
|
Year
Ended December 31,
|
||||||||||||
|
(in
millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Net
losses on investments and notes receivable
|
$ | (93 | ) | $ | (54 | ) | $ | (109 | ) | |||
|
Interest
income
|
47 | 79 | 67 | |||||||||
|
Other
|
(12 | ) | (2 | ) | (14 | ) | ||||||
| $ | (58 | ) | $ | 23 | $ | (56 | ) | |||||
Refer to
Note G – Investments and Notes
Receivable to our 2008 consolidated financial statements included in Item
8 of this Annual Report for more information regarding our investment portfolio.
Our interest income decreased in 2008, as compared to 2007, due primarily to
lower average investment rates. Our interest income increased in 2007, as
compared to 2006, due primarily to higher average cash balances, partially
offset by lower average investment rates.
Tax
Rate
The
following provides a summary of our reported tax rate:
|
Percentage
Point
Increase (Decrease)
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2008 vs.
2007 |
2007 vs.
2006 |
||||||||||||||||
|
Reported
tax rate
|
0.2 | % | (13.0 | )% | 1.2 | % | 13.2 | % | (14.2 | )% | ||||||||||
|
Impact
of certain charges
|
18.9 | % | 25.6 | % | 20.2 | % | (6.7 | )% | 5.4 | % | ||||||||||
In 2008, the increase in our reported tax rate, as compared to 2007, related primarily to the impact of certain charges and gains that are taxed at different rates than our effective tax rate. These amounts related primarily to gains and losses associated with the divestiture of certain non-strategic businesses and investments, goodwill and intangible asset impairment charges, litigation-related charges, and changes in the geographic mix of our net sales. In 2007, the decrease in our reported tax rate as compared to 2006 related primarily to additional foreign tax credits, changes in the geographic mix of our net sales, and the impact of certain charges during 2007 that are taxed at different rates than our effective tax rate. These charges included litigation- and restructuring-related charges, changes to the reserve for uncertain tax positions relating to items originating in prior periods, purchased research and development, and losses associated with the divestiture of non-strategic businesses.
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes. At December 31, 2008, we had $1.107 billion of gross unrecognized
tax benefits, $978 million of which, if recognized, would affect our effective
tax rate. At December 31, 2007, we had $1.180 billion of gross unrecognized tax
benefits, $415 million of which, if recognized, would affect our effective tax
rate. The net reduction in our unrecognized tax benefits is
attributable primarily to the resolution of certain unrecognized tax positions
in 2008. The amount of unrecognized tax benefits which, if recognized, would
affect our effective tax rate increased at December 31, 2008, as compared to
December 31, 2007, due to the adoption of FASB Statement No. 141(R), Business Combinations, as of
January 1, 2009, which requires that we
60
recognize
changes in acquired income tax uncertainties (applied to acquisitions before and
after the adoption date) as income tax expense or benefit.
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 2000 and substantially all material state, local, and foreign
income tax matters through 2001.
The
following provides a summary of key performance indicators that we use to assess
our liquidity and operating performance.
Net Debt3
|
As
of December 31,
|
||||||||
|
(in
millions)
|
2008
|
2007
|
||||||
|
Short-term
debt
|
$ | 2 | $ | 256 | ||||
|
Long-term
debt
|
6,743 | 7,933 | ||||||
|
Total
debt
|
6,745 | 8,189 | ||||||
|
Less:
cash and cash equivalents
|
1,641 | 1,452 | ||||||
|
Net
debt
|
$ | 5,104 | $ | 6,737 | ||||
EBITDA4
|
Year
Ended December 31,
|
||||||||||||
|
(in
millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Net
loss
|
$ | (2,036 | ) | $ | (495 | ) | $ | (3,577 | ) | |||
|
Interest
income
|
(47 | ) | (79 | ) | (67 | ) | ||||||
|
Interest
expense
|
468 | 570 | 435 | |||||||||
|
Income
tax expense (benefit)
|
5 | (74 | ) | 42 | ||||||||
|
Depreciation
|
321 | 298 | 251 | |||||||||
|
Amortization
|
543 | 620 | 474 | |||||||||
|
EBITDA
|
$ | (746 | ) | $ | 840 | $ | (2,442 | ) | ||||
|
3
|
Management uses net debt to
monitor and evaluate cash and debt levels and believes it is a measure
that provides valuable information regarding our net financial position
and interest rate exposure. Users of our financial statements should
consider this non-GAAP financial information in addition to, not as a
substitute for, nor as superior to, financial information prepared in
accordance with GAAP.
|
|
4
|
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
adjusted EBITDA as a component of the financial covenants included in our
credit agreements. Users of our financial statements should consider this
non-GAAP financial information in addition to, not as a substitute for,
nor as superior to, financial information prepared in accordance with
GAAP. Our EBITDA included goodwill and intangible asset impairment
charges; acquisition-, divestiture-, litigation- and restructuring-related
net charges (pre-tax) of $2.872 billion for 2008, $1.249 billion for 2007
and $4.622 billion for 2006. See Financial Summary for a
description of 2008 charges (credits). In 2007, these charges
included:
|
|
•
|
$21
million of intangible asset impairment charges related to our decision to
temporarily suspend further significant funding of the Petal™ bifurcation
stent project acquired with Advanced Stent
Technologies;
|
|
•
|
$122
million of acquisition-related charges, including purchased research and
development related primarily to our acquisition of Remon Medical
Technologies, Inc. and integration costs related to our acquisition of
Guidant;
|
|
•
|
$560
million, primarily non-cash, associated with the write-down of goodwill in
connection with the divestiture of non-strategic
businesses;
|
|
•
|
$365
million attributable to estimated potential losses associated with patent
litigation with Johnson &
Johnson;
|
|
•
|
$181
million of restructuring charges associated with our on-going expense and
head count reduction initiative, net of accelerated
depreciation.
|
|
|
In
2006, these charges represented costs associated with our acquisition of
Guidant Corporation and primarily included: purchased research and
development charges; a charge for the step-up value of Guidant inventory
sold; and a credit resulting primarily from the reversal of accrued
contingent payments due to the cancellation of the abdominal aortic
aneurysm (AAA) program that we obtained as part of our acquisition of
TriVascular, Inc.
|
61
Cash
Flow
|
Year
Ended December 31,
|
||||||||||||
|
(in
millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Cash
provided by operating activities
|
$ | 1,216 | $ | 934 | $ | 1,845 | ||||||
|
Cash
provided by (used for) investing activities
|
324 | (474 | ) | (9,312 | ) | |||||||
|
Cash
(used for) provided by financing activities
|
(1,350 | ) | (680 | ) | 8,439 | |||||||
Operating
Activities
Cash
generated by our operating activities continues to be a major source of funds
for servicing our outstanding debt obligations and investing in our growth. The
increase in operating cash flow in 2008, as compared to 2007, is due primarily
to the receipt of a $250 million milestone payment from Abbott following the
July 2008 FDA approval of the XIENCE V™ everolimus-eluting coronary stent
system. In addition, we made lower interest payments of $129 million in 2008, as
compared to 2007, due to lower average debt balances. These increases were
partially offset by $187 million of payments made in 2008 towards the Guidant
multi-district litigation (MDL) settlement, described in Note L – Commitments and
Contingencies to
our consolidated financial statements included in Item 8 of this
Annual Report.
The
decrease in operating cash flow in 2007, as compared to 2006, is attributable
primarily to: approximately $400 million in tax payments made in the first
quarter of 2007, associated principally with the gain on Guidant’s sale of its
vascular intervention and endovascular solutions businesses to Abbott; an
increase in interest payments of $160 million due to higher average debt levels;
decreases in EBITDA, excluding acquisition-, divestiture-, litigation- and
restructuring-related charges of approximately $150 million; and an increase in
severance and other merger and restructuring-related payments of approximately
$100 million, including severance payments made in the first half of 2007 in
conjunction with our acquisition and integration of Guidant. See Note D – Acquisitions to our
consolidated financial statements included in Item 8 of this Annual Report for
further details.
Investing
Activities
We made
capital expenditures of $362 million in 2008, $363 million in 2007, and $341
million in 2006. We expect to incur capital expenditures of approximately
$375 million during 2009, which includes capital expenditures to upgrade
further our quality systems and information systems infrastructure, to enhance
our manufacturing capabilities in order to support a second drug-eluting stent
platform, and to support continued growth in our business units.
During
2008, our investing activities included proceeds of approximately $1.3 billion
associated with the divestiture of certain businesses, $95 million of proceeds
associated with definitive agreements with Saints Capital and Paul Capital
Partners to sell the majority of our investments in, and notes receivable from
certain publicly traded and privately held companies, and $54 million from the
sale of certain other investments and collections of notes receivable. These
cash inflows were partially offset by $675 million in payments related to prior
period acquisitions associated primarily with Advanced Bionics, and $39 million
of cash payments for investments in privately held companies, and acquisitions
of certain technology rights. In addition, we paid $21 million, net of cash
acquired, to acquire CryoCor, Inc. and $17 million, net of cash acquired to
acquire Labcoat, Ltd. Refer to Note G – Investments and Notes
Receivable and Note D –
Acquisitions to our consolidated financial statements contained in Item 8
of this Annual Report for more information.
62
During
2007, our investing activities included $248 million of payments related to
prior period acquisitions, associated primarily with Advanced Bionics; and $53
million of cash payments for investments in privately held companies, and
acquisitions of certain technology rights. Further, we paid approximately $70
million in cash, net of cash acquired, to acquire Remon Medical Technologies,
Inc. We also issued approximately five million shares of our common stock valued
at approximately $90 million and paid $10 million in cash, in addition to our
previous investments of $40 million, to acquire the remaining interests of
EndoTex Interventional Systems, Inc. These cash outflows were partially offset
by $243 million of gross proceeds from the sale of several of our investments
in, and collection of notes receivable from, certain privately held and publicly
traded companies. Refer to Note G – Investments and Notes
Receivable and Note D –
Acquisitions to our consolidated financial statements contained in Item 8
of this Annual Report for more information.
During
2006, we paid an aggregate purchase price of approximately $21.7 billion, net of
cash acquired, to acquire Guidant Corporation, which included: approximately
$7.8 billion of cash; 577 million shares of our common stock at an estimated
fair value of $12.5 billion; approximately 40 million of our fully vested stock
options granted to Guidant employees at an estimated fair value of $450 million;
$97 million associated with the buyout of options of certain former vascular
intervention and endovascular solutions Guidant employees; and $770 million of
direct acquisition costs, including a $705 million payment made to Johnson &
Johnson in connection with the termination of its merger agreement with Guidant.
In addition, our investing activities during 2006 included $397 million of
payments related to prior period acquisitions, associated primarily with
Advanced Bionics, CryoVascular Systems, Inc. and Smart Therapeutics, Inc.;
and $98 million of payments for acquisitions of certain technology rights.
Partially offsetting these cash outflows were proceeds of $159 million related
to the maturity of marketable securities and $33 million of proceeds from the
sale of investments in certain privately held companies.
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 expect to continue to use
a significant portion of our future operating cash flow over the next several
years to reduce our debt obligations.
Debt
We had
total debt of $6.745 billion at December 31, 2008 at an average
interest rate of 5.65 percent as compared to total debt of
$8.189 billion at December 31, 2007 at an average interest rate of
6.36 percent. The debt maturity schedule for the significant
components of our debt obligations as of December 31, 2008, is as
follows:
|
(in
millions)
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Term
loan
|
$ | 825 | $ | 2,000 | $ | 2,825 | ||||||||||||||||||||||
|
Abbott
Laboratories loan
|
900 | 900 | ||||||||||||||||||||||||||
|
Senior
notes
|
850 | $ | 2,200 | 3,050 | ||||||||||||||||||||||||
| $ | $ | 825 | $ | 3,750 | $ | $ | $ | 2,200 | $ | 6,775 | ||||||||||||||||||
|
|
Note:
|
The
table above does not include discounts associated with our Abbott loan and
senior notes, or amounts related to interest rate swaps used to hedge the
fair value of certain of our senior
notes.
|
63
During
2008, we made debt prepayments of $1.175 billion outstanding under our term loan
using cash generated by operations. In addition, we repaid $250 million
outstanding under our credit facility secured by our U.S. trade receivables.
There were no amounts outstanding under this facility at December 31, 2008. We
also maintain a separate $2.0 billion revolving credit facility. In 2008, we
issued a $717 million surety bond backed by a $702 million letter of credit and
$15 million of cash to secure a damage award related to the Johnson &
Johnson patent infringement case pending appeal, described in Note L – Commitments and
Contingencies, reducing the credit availability under the revolving
facility. There were no amounts outstanding under the facility at December 31,
2008. In February 2009, we amended our term loan and revolving credit facility
agreement to increase flexibility under our financial covenants. Refer to
Note I – Borrowings and Credit
Arrangements to our 2008 consolidated financial statements included in
Item 8 of this Annual Report for information regarding the terms of the
amendment. At the same time, we prepaid $500 million of our term loan
and reduced our revolving credit facility by $250 million. As a result,
our next debt maturity is $325 million due in April
2010.
During
2007, we prepaid $1.0 billion outstanding under the term loan, using $750
million of cash on hand and $250 million in borrowings against a $350 million
credit facility secured by our U.S. trade receivables. In addition, in
2007, cash flows from financing activities included a $60 million contractual
payment made to reimburse Abbott for a portion of its cost of borrowing $1.4
billion in 2006 to purchase shares of our common stock in connection with our
acquisition of Guidant. Refer to Note D – Acquisitions to our
2008 consolidated financial statements included in Item 8 of this Annual Report
for more information regarding the Abbott transaction.
During
2006, we received net proceeds from borrowings of $6.888 billion, which we used
primarily to finance the cash portion of the Guidant acquisition. In addition,
we received $1.4 billion from the sale of shares of our common stock to Abbott.
Refer to Note D – Acquisitions
and Note I – Borrowings
and Credit Arrangements to our consolidated financial statements
contained in Item 8 of this Annual Report for more information on the Abbott
transaction and our debt obligations.
Our term
loan and revolving credit facility agreement requires that we maintain certain
financial covenants. At December 31, 2008, we were in compliance with the
required covenants. Our inability to maintain these covenants could require us
to seek to further renegotiate the terms of our credit facilities or seek
waivers from compliance with these covenants, both of which could result in
additional borrowing costs. See Note I – Borrowings and Credit
Arrangements to our consolidated financial statements contained in Item 8
of this Annual Report for more information regarding these
covenants.
Equity
During
2008, we received $71 million in proceeds from stock issuances related to
our stock option and employee stock purchase plans, as compared to $132 million
in 2007 and $145 million in 2006. Proceeds from the exercise of employee stock
options and employee stock purchases vary from period to period based upon,
among other factors, fluctuations in the trading price of our common stock and
in the exercise and stock purchase patterns of employees.
We did
not repurchase any of our common stock during 2008, 2007 or 2006. Approximately
37 million shares remain under our previous share repurchase
authorizations.
Contractual
Obligations and Commitments
The
following table provides a summary of certain information concerning our
obligations and commitments to make future payments, which is in addition to our
outstanding principal debt obligations as presented in the previous table, and
is based on conditions in existence as of December 31, 2008. See Note D - Acquisitions and
64
Note I - Borrowings and Credit
Arrangements to our 2008 consolidated financial statements included
in Item 8 of this Annual Report for additional information regarding our
acquisition and debt obligations.
|
Payments
Due by Period
|
||||||||||||||||||||||||||||
|
(in
millions)
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Lease
obligations (1)
|
$ | 64 | $ | 56 | $ | 45 | $ | 35 | $ | 26 | $ | 57 | $ | 283 | ||||||||||||||
|
Purchase
obligations (1)(2)
|
338 | 39 | 11 | 4 | 3 | 395 | ||||||||||||||||||||||
|
Minimum
royalty obligations (1)
|
29 | 27 | 14 | 2 | 1 | 6 | 79 | |||||||||||||||||||||
|
Unrecognized
tax benefits
|
124 | 124 | ||||||||||||||||||||||||||
|
Interest
payments (1)(3)
|
338 | 297 | 199 | 133 | 133 | 747 | 1,847 | |||||||||||||||||||||
| $ | 893 | $ | 419 | $ | 269 | $ | 174 | $ | 163 | $ | 810 | $ | 2,728 | |||||||||||||||
|
(1)
|
In
accordance with U.S. GAAP, these obligations relate to expenses associated
with future periods and are not reflected in our consolidated balance
sheets.
|
|
(2)
|
These
obligations relate primarily to inventory commitments and capital
expenditures entered in the normal course of
business.
|
|
(3)
|
Interest
payment amounts related to our term loan are projected using market
interest rates as of December 31, 2008. Future interest payments may
differ from these projections based on changes in the market interest
rates.
|
The table
above does not reflect unrecognized tax benefits of $1.251 billion, the timing
of which is uncertain. Refer to Note K– Income Taxes to our
2008 consolidated financial statements included in Item 8 of this Annual Report
for more information on these unrecognized tax benefits.
Certain
of our acquisitions involve the payment of contingent consideration. See Note D - Acquisitions to our
2008 consolidated financial statements included in Item 8 of this Annual
Report for the estimated maximum potential amount of future contingent
consideration we could be required to pay associated with our recent
acquisitions. Since it is not possible to estimate when, or even if, performance
milestones will be reached, or the amount of contingent consideration payable
based on future revenues, the maximum contingent consideration has not been
included in the table above. Additionally, we may consider satisfying these
commitments by issuing our stock or refinancing the commitments with cash,
including cash obtained through the sale of our stock. Payments due to the
former shareholders of Advanced Bionics in connection with our amended merger
agreement are accrued as of December 31, 2008, and therefore, do not appear in
the table above.
Certain
of our equity investments give us the option to acquire the company in the
future. Since it is not possible to estimate when, or even if, we will exercise
our option to acquire these companies, we have not included these future
potential payments in the table above.
At
December 31, 2008, we had outstanding letters of credit of approximately $819
million, as compared to approximately $110 million at December 31, 2007, which
consisted primarily of bank guarantees and collateral for workers’
compensation programs. The increase is due primarily to a $702 million
letter of credit entered into in 2008 in order to secure a damage award pending
appeal related to the Johnson & Johnson patent infringement case. As of
December 31, 2008, none of the beneficiaries had drawn upon the letters of
credit or guarantees. We believe we have sufficient cash on hand and intend to
fund these payments without drawing on the letters of credit.
Critical
Accounting Policies and Estimates
Our
financial results are affected by the selection and application of accounting
policies. We have adopted accounting policies to prepare our consolidated
financial statements in conformity with U.S. GAAP. We describe these accounting
polices in Note A—Significant Accounting
Policies to our 2008 consolidated financial
65
statements
included in Item 8 of this Annual Report.
To
prepare our consolidated financial statements in accordance with U.S. GAAP,
management makes estimates and assumptions that may affect the reported amounts
of our assets and liabilities, the disclosure of contingent assets and
liabilities at the date of our financial statements and the reported amounts of
our revenue and expenses during the reporting period. Our actual results may
differ from these estimates.
We
consider estimates to be critical if (i) we are required to make assumptions
about material matters that are uncertain at the time of estimation or if (ii)
materially different estimates could have been made or it is reasonably likely
that the accounting estimate will change from period to period. The following
are areas requiring management’s judgment that we consider
critical:
Revenue
Recognition
We
generate revenue primarily from the sale of single-use medical devices. We
consider revenue to be realized or realizable and earned when all of the
following criteria are met: persuasive evidence of a sales arrangement exists; delivery has occurred or
services have been rendered; the price is fixed or determinable; and
collectibility is reasonably assured. We generally meet these criteria at the
time of shipment, unless a consignment arrangement exists or we are required to
provide additional services. We recognize revenue from consignment arrangements
based on product usage, or implant, which indicates that the sale is complete.
For our other transactions, we recognize revenue when our products are delivered
and risk of loss transfers to the customer, provided there are no
substantive remaining performance obligations required of us or any matters
requiring customer acceptance, and provided we can form an estimate for sales
returns. For multiple-element arrangements where the sale of devices is combined
with future service obligations, as with our LATITUDE® Patient Management
System, we defer revenue on the undelivered element based on verifiable
objective evidence of fair value, and recognize the associated revenue over the
related service period. We present revenue net of sales taxes in our
consolidated statements of operations.
We
generally allow our customers to return defective, damaged and, in certain
cases, expired products for credit. We base our estimate for sales returns upon
historical trends and record the amount as a reduction to revenue when we
sell the initial product. In addition, we may allow customers to return
previously purchased products for next-generation product offerings; for these
transactions, we defer recognition of revenue based upon an estimate of the
amount of product to be returned when the next-generation products are shipped
to the customer.
We offer
sales rebates and discounts to certain customers. We treat sales rebates and
discounts as a reduction of revenue and classify the corresponding liability as
current. We estimate rebates for products where there is sufficient historical
information available to predict the volume of expected future rebates. If we
are unable to estimate the expected rebates reasonably, we record a liability
for the maximum rebate percentage offered. We have entered certain agreements
with group purchasing organizations to sell our products to participating
hospitals at negotiated prices. We recognize revenue from these agreements
following the same revenue recognition criteria discussed above.
Inventory
Provisions
We base
our provisions for excess and obsolete inventory primarily on our estimates of
forecasted net sales. A significant change in the timing or level of demand for
our products as compared to forecasted amounts may result in recording
additional provisions for excess and obsolete inventory in the future. The
industry in which we participate is characterized by rapid product development
and frequent new product introductions. Uncertain timing of next-generation
product approvals, variability in product launch strategies, product recalls and
variation in product utilization all affect our estimates related to excess and
obsolete inventory.
66
Valuation of Business
Combinations
We record
intangible assets acquired in business combinations under the purchase method of
accounting. We allocate the amounts we pay for each acquisition to the assets we
acquire and liabilities we assume based on their fair values at the dates of
acquisition in accordance with FASB Statement No. 141, Business Combinations,
including identifiable intangible assets and purchased research and development
which either arise from a contractual or legal right or are separable from
goodwill. We base the fair value of identifiable intangible assets and purchased
research and development on detailed valuations that use information and
assumptions provided by management. We allocate any excess purchase price over
the fair value of the net tangible and identifiable intangible assets acquired
to goodwill. The use of alternative valuation assumptions, including estimated
cash flows and discount rates, and alternative estimated useful life assumptions
could result in different purchase price allocations, purchased research and
development charges, and intangible asset amortization expense in current and
future periods.
Purchased Research and
Development
Our
purchased research and development represents the value of acquired in-process
projects that have not yet reached technological feasibility and have no
alternative future uses as of the date of acquisition. The primary basis for
determining the technological feasibility of these projects is obtaining
regulatory approval to market the underlying products in an applicable
geographic region. Through December 31, 2008, we have expensed the value
attributable to these in-process projects at the time of the acquisition in
accordance with accounting standards effective through that date. If the
projects are not successful or completed in a timely manner, we may not realize
the financial benefits expected for these projects or for the acquisition as a
whole. In addition, we record certain costs associated with our alliances as
purchased research and development.
We use
the income approach to determine the fair values of our purchased research and
development. This approach calculates fair value by estimating the after-tax
cash flows attributable to an in-process project over its useful life and then
discounting these after-tax cash flows back to a present value. We base our
revenue assumptions on estimates of relevant market sizes, expected market
growth rates, expected trends in technology and expected levels of market share.
In arriving at the value of the in-process projects, we consider, among other
factors: the in-process projects’ stage of completion; the complexity of the
work completed as of the acquisition date; the costs already incurred; the
projected costs to complete; the contribution of core technologies and other
acquired assets; the expected introduction date; and the estimated useful life
of the technology. We base the discount rate used to arrive at a present value
as of the date of acquisition on the time value of money and medical technology
investment risk factors. For the in-process projects acquired in connection with
our recent acquisitions, we used the following ranges of risk-adjusted discount
rates to discount our projected cash flows: 34 percent in 2008, 19 percent in
2007, and 13 percent to 17 percent in 2006. We believe that the estimated
in-process research and development amounts so determined represent the fair
value at the date of acquisition and do not exceed the amount a third party
would pay for the projects.
Impairment of Intangible
Assets
We review
intangible assets subject to amortization quarterly to determine if any adverse
conditions exist or a change in circumstances has occurred that would indicate
impairment or a change in the remaining useful life. Conditions that may
indicate impairment include, but are not limited to, a significant adverse
change in legal factors or business climate that could affect the value of an
asset, a product recall, or an adverse action or assessment by a regulator. If
an impairment indicator exists we test the intangible asset for
recoverability. For purposes of the recoverability test, we group our
intangible assets with other assets and liabilities at the lowest level of
identifiable cash flows if the intangible asset does not generate cash flows
independent of other assets and liabilities. If the carrying value of the
intangible asset (asset group) exceeds the undiscounted cash flows expected to
result from the use and eventual disposition of the intangible asset (asset
group), we will write the carrying value down to the fair
value in the period identified. In addition, we review our indefinite-lived
intangible
67
assets at
least annually for impairment and reassess their classification as
indefinite-lived assets. To test for impairment, we calculate the fair value of
our indefinite-lived intangible assets and compare the calculated fair values to
the respective carrying values. If the carrying value exceeds the
fair value of the indefinite-lived intangible asset, the carrying value is
written down to the fair value.
We
generally calculate fair value of our intangible assets as the present value of
estimated future cash flows we expect to generate from the asset using a
risk-adjusted discount rate. In determining our estimated
future cash flows associated with our intangible assets,
we use estimates and assumptions about future revenue
contributions, cost structures and remaining useful lives of the asset (asset
group). The use of alternative assumptions, including estimated cash
flows, discount rates, and alternative estimated remaining
useful lives could result in different calculations of impairment. See
Note A - Significant
Accounting Policies and Note E - Goodwill and
Other Intangible Assets to our 2008 consolidated financial statements
included in Item 8 of this Annual Report for more information related to
impairment of intangible assets during 2008, 2007 and 2006.
Goodwill
Impairment
We test
our goodwill balances as of April 1 during the second quarter of each year for
impairment. We test our goodwill balances more frequently if indicators are
present or changes in circumstances suggest that impairment may exist. In
performing the test, we utilize the two-step approach prescribed under FASB
Statement No. 142, Goodwill and Other Intangible
Assets. The first step requires a comparison of the carrying value of the
reporting units, as defined, to the fair value of these units. We have
identified our domestic divisions, which in aggregate make up the U.S.
reportable segment, and our two international operating segments as our
reporting units for purposes of the goodwill impairment test. To
derive the carrying value of our reporting units at the time of acquisition, we
assign goodwill to the reporting units that we expect to benefit from the
respective business combination. In addition, for purposes of performing our
annual goodwill impairment test, assets and liabilities, including corporate
assets, which relate to a reporting unit’s operations, and would be considered
in determining fair value, are allocated to the individual reporting units. We
allocate assets and liabilities not directly related to a specific reporting
unit, but from which the reporting unit benefits, based primarily on the
respective revenue contribution of each reporting unit. If the carrying value of
a reporting unit exceeds its fair value, we will perform the second step of the
goodwill impairment test to measure the amount of impairment loss, if
any.
The
second step of the goodwill impairment test compares the implied fair value of a
reporting unit’s goodwill to its carrying value. If we were unable to complete
the second step of the test prior to the issuance of our financial statements
and an impairment loss was probable and could be reasonably estimated, we would
recognize our best estimate of the loss in our current period financial
statements and disclose that the amount is an estimate. We would then
recognize any adjustment to that estimate in subsequent reporting periods, once
we have finalized the second step of the impairment test.
During
the fourth quarter of 2008, we recorded a $2.613 billion goodwill impairment
charge associated with our acquisition of Guidant. The decline in our stock
price and our market capitalization during the fourth quarter created an
indication of potential impairment of our goodwill balance; therefore, we
performed an interim impairment test. Key factors contributing to the impairment
charge included disruptions in the credit and equity market, and the resulting
impacts to weighted-average cost of capital, and changes in CRM market demand
relative to our original assumptions at the time of acquisition. Refer to Note E – Goodwill and Other
Intangible Assets to our consolidated financial statements contained in
Item 8 of this Annual Report for more information.
Investments in Publicly
Traded and Privately Held Entities
We
account for investments in entities over which we have the ability to exercise
significant influence under the equity method if we hold 50 percent or less
of the voting stock and the entity is not a variable interest
68
entity in
which we are the primary beneficiary. We account for investments in entities
over which we do not have the ability to exercise significant influence under
the cost method. Our determination of whether we have the ability to exercise
significant influence over an entity requires judgment. We consider the guidance
in Accounting Principles Board (APB) Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock, Emerging Issues Task Force (EITF) Issue No.
03-16, Accounting for
Investments in Limited Liability Companies, and EITF Topic D-46, Accounting for Limited Partnership
Investments, in determining whether we have the ability to exercise
significant influence over an entity.
We
regularly review our investments for impairment indicators. If we
determine that impairment exists and it is other-than-temporary, we recognize an
impairment loss equal to the difference between an investment’s carrying value
and its fair value. See Note A
- Significant Accounting Policies and Note G- Investments and Notes
Receivable to our 2008 consolidated financial statements included in Item
8 of this Annual Report for a detailed analysis of our investments and our
accounting treatment for our investment portfolio.
Income
Taxes
We
utilize the asset and liability method for accounting for income taxes. Under
this method, we determine deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of our assets and
liabilities. We measure deferred tax assets and liabilities using the enacted
tax rates and laws that will be in effect when we expect the differences to
reverse.
We
recognized net deferred tax liabilities of $1.351 billion at December 31,
2008 and $1.605 billion at December 31, 2007. The liabilities relate
primarily to deferred taxes associated with our acquisitions. The assets relate
primarily to the establishment of inventory and product-related reserves,
litigation and product liability reserves, purchased research and development,
investment write-downs, net operating loss carryforwards and tax credit
carryforwards. In light of our historical financial performance, we believe we
will recover substantially all of these assets. We reduce our deferred tax
assets by a valuation allowance if, based upon the weight of available evidence,
it is more likely than not that we will not realize some portion or all of the
deferred tax assets. We consider relevant evidence, both positive and negative,
to determine the need for a valuation allowance. Information evaluated includes
our financial position and results of operations for the current and preceding
years, as well as an evaluation of currently available information about future
years.
We do not
provide income taxes on unremitted earnings of our foreign subsidiaries where we
have indefinitely reinvested such earnings in our foreign operations. It is not
practical to estimate the amount of income taxes payable on the earnings that
are indefinitely reinvested in foreign operations. Unremitted earnings of our
foreign subsidiaries that we have indefinitely reinvested offshore are
$9.327 billion at December 31, 2008 and $7.804 billion at
December 31, 2007.
We
provide for potential amounts due in various tax jurisdictions. In the ordinary
course of conducting business in multiple countries and tax jurisdictions, there
are many transactions and calculations where the ultimate tax outcome is
uncertain. Judgment is required in determining our worldwide income tax
provision. In our opinion, we have made adequate provisions for income taxes for
all years subject to audit. Although we believe our estimates are reasonable, we
can make no assurance that the final tax outcome of these matters will not be
different from that which we have reflected in our historical income tax
provisions and accruals. Such differences could have a material impact on our
income tax provision and operating results in the period in which we make such
determination.
See Note K — Income Taxes to
our 2008 consolidated financial statements included in Item 8 of this
Annual Report for a detailed analysis of our income tax accounting.
69
Legal, Product Liability
Costs and Securities Claims
We are
involved in various legal and regulatory proceedings, including intellectual
property, breach of contract, securities litigation and product liability suits.
In some cases, the claimants seek damages, as well as other relief, which, if
granted, could require significant expenditures or impact our ability to sell
our products. We are substantially self-insured with respect to product
liability claims. We maintain insurance policies providing limited coverage
against securities claims. We generally record losses for claims in excess of
purchased insurance in earnings at the time and to the extent they are probable
and estimable. In accordance with FASB Statement No. 5, Accounting for
Contingencies, we accrue anticipated costs of settlement, damages, losses
for general product liability claims and, under certain conditions, costs of
defense, based on historical experience or to the extent specific losses are
probable and estimable. Otherwise, we expense these costs as incurred. 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.
Our
accrual for legal matters that are probable and estimable was
$1.089 billion at December 31, 2008 and $994 million at
December 31, 2007, and includes estimated costs of settlement, damages and
defense. The
increase in our accrual is due primarily to a pre-tax charge of $334 million
resulting from a ruling by a federal judge in a patent infringement case brought
against us by Johnson & Johnson, which we recorded during the third quarter
of 2008. Partially offsetting this increase was a reduction of $187 million as a
result of payments made in the fourth quarter of 2008 related to the Guidant
multi-district litigation (MDL) settlement described in Note L – Commitments and
Contingencies. In the first quarter of 2009, we made an additional MDL
payment of approximately $13 million, and anticipate making the remaining
payments of $20 million during the first half of 2009. These amounts were both
accrued as of December 31, 2008. We continue to assess certain 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, cash flows and our ability to comply with our debt covenants. See
further discussion of our material legal proceedings in Item 3. Legal Proceedings and
Note L — Commitments and
Contingencies to our 2008 consolidated financial statements included in
Item 8 of this Annual Report for further discussion of our individual
material legal proceedings.
New
Accounting Standards
Standards
Implemented
Interpretation
No. 48
In July
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, to create a single model to address accounting for
uncertainty in tax positions. We adopted Interpretation No. 48 as of the first
quarter of 2007. Interpretation No. 48 requires the use of a two-step approach
for recognizing and measuring tax benefits taken or expected to be taken in a
tax return, as well as enhanced disclosures regarding uncertainties in income
tax positions, including a roll forward of tax benefits taken that do not
qualify for financial statement recognition. Refer to Note K – Income Taxes to our
2008 consolidated financial statements included in Item 8 of this Annual Report
for more information regarding our application of Interpretation No. 48 and its
impact on our consolidated financial statements.
Statement
No. 157
In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements.
Statement No. 157 defines fair value, establishes a framework for measuring fair
value in accordance with U.S. GAAP, and expands disclosures about fair value
measurements. Statement No. 157 does not require any new fair value
measurements; rather, it applies to other accounting pronouncements that require
or permit fair value measurements. We adopted the provisions of Statement No.
157 for financial assets and financial liabilities as of January 1, 2008, and
will apply those provisions to nonfinancial assets and nonfinancial liabilities
as of January 1, 2009. Refer to Note C – Fair Value Measurements
to our consolidated financial statements contained in Item 8 of this
Annual Report for a discussion of our adoption of Statement No. 157 and its
impact on our financial statements.
70
Statement
No. 158
In
September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, which amends Statements
Nos. 87, 88, 106 and 132(R). Statement No. 158 requires recognition of the
funded status of a benefit plan in the consolidated statements of financial
position, as well as the recognition of certain gains and losses that arise
during the period, but are deferred under pension accounting rules, in other
comprehensive income (loss). Additionally, Statement No. 158 requires that,
beginning with fiscal years ending after December 15, 2008, a business entity
measure plan assets and benefit obligations as of its fiscal year-end statement
of financial position. We adopted the measurement-date requirement in 2008 and
the other provisions of Statement No. 158 in 2006. Refer to Note A – Significant Accounting
Policies to our 2008 consolidated financial statements included in Item 8
of this Annual Report for more information on our pension and other
postretirement plans.
Statement
No. 159
In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, which allows an entity to elect to
record financial assets and financial liabilities at fair value upon their
initial recognition on a contract-by-contract basis. We adopted Statement No.
159 as of January 1, 2008 and did not elect the fair value option for our
eligible financial assets and financial liabilities.
New Standards to be
Implemented
Statement
No. 161
In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities, which amends Statement No. 133 by
requiring expanded disclosures about an entity’s derivative instruments and
hedging activities. Statement No. 161 requires increased qualitative,
quantitative, and credit-risk disclosures, including (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under Statement No. 133 and its related interpretations,
and (c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. We are
required to adopt Statement No. 161 for our first quarter ending March 31,
2009.
Staff
Position No. 157-2
In
February 2008, the FASB released Staff Position No. 157-2, Effective Date of FASB Statement
No. 157, which delays the effective date of Statement No. 157
for all nonfinancial assets and nonfinancial liabilities, except for those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis. We are required to apply the provisions of Statement No. 157 to
nonfinancial assets and nonfinancial liabilities as of January 1, 2009. We do
not believe the adoption of Staff Position No. 157-2 will have a material impact
on our future results of operations or financial position.
Statement
No. 141(R)
In
December 2007, the FASB issued Statement No. 141(R), Business Combinations, a
replacement for Statement No. 141. Statement No. 141(R) retains the fundamental
requirements of Statement No. 141, but requires the recognition of all assets
acquired and liabilities assumed in a business combination at their fair values
as of the acquisition date. It also requires the recognition of assets acquired
and liabilities assumed arising from contractual contingencies at their
acquisition date fair values. Additionally, Statement No. 141(R) supersedes FASB
Interpretation No. 4, Applicability of FASB Statement No.
2 to Business Combinations Accounted for by the Purchase Method, which
required research and development assets acquired in a business combination that
had no alternative future use to be measured at their fair values and expensed
at the acquisition date.
71
Statement
No. 141(R) now requires that purchased research and development be recognized as
an intangible asset. We are required to adopt Statement No. 141(R) prospectively
for any acquisitions on or after January 1, 2009, except for changes in tax
assets and liabilities associated with prior acquisitions.
Management’s
Report on Internal Control over Financial Reporting
As the
management of Boston Scientific Corporation, we are responsible for establishing
and maintaining adequate internal control over financial reporting. We designed
our internal control system to provide reasonable assurance to management and
the Board of Directors regarding the preparation and fair presentation of our
financial statements.
We
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, we used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control—Integrated Framework. Based on our assessment, we believe that,
as of December 31, 2008, our internal control over financial reporting is
effective at a reasonable assurance level based on these criteria.
Ernst &
Young LLP, an independent registered public accounting firm, has issued an audit
report on the effectiveness of our internal control over financial reporting.
This report in which they expressed an unqualified opinion is included
below.
| /s/ James R. Tobin |
/s/
Sam R. Leno
|
|||
|
James
R. Tobin
|
Sam
R. Leno
|
|||
|
President
and Chief Executive Officer
|
Executive
Vice President – Finance & Information Systems and Chief Financial
Officer
|
72
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders of Boston Scientific Corporation
We have
audited Boston Scientific Corporation’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Boston Scientific Corporation’s
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Boston Scientific Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
based on the COSO criteria.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Boston
Scientific Corporation as of December 31, 2008 and December 31, 2007 and the
related consolidated statements of operations, stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2008 of
Boston Scientific Corporation and our report dated February 24, 2009 expressed
an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Boston,
Massachusetts
February
24, 2009
73
ITEM
7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
develop, manufacture and sell medical devices globally and our earnings and cash
flows 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 actively 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 $4.396 billion at December 31, 2008 and $4.135 billion at
December 31, 2007. We recorded $132 million of other assets and $195 million of
other liabilities to recognize the fair value of these derivative instruments at
December 31, 2008 as compared to $19 million of other assets and
$118 million of other liabilities at December 31, 2007. A
ten percent appreciation in the U.S. dollar’s value relative to the hedged
currencies would increase the derivative instruments’ fair value by $315 million
at December 31, 2008 and by $293 million at December 31, 2007. A ten
percent depreciation in the U.S. dollar’s value relative to the hedged
currencies would decrease the derivative instruments’ fair value by $385 million
at December 31, 2008 and by $355 million at December 31, 2007. 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.
See Note C - Fair Value
Measurements to our 2008 consolidated financial statements included in
Item 8 of this Annual Report for detailed information regarding our derivative
financial instruments.
74
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders of Boston Scientific Corporation
We have
audited the accompanying consolidated balance sheets of Boston Scientific
Corporation as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2008. Our audits also
included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Boston Scientific
Corporation at December 31, 2008 and 2007, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As
discussed in Note K to the accompanying consolidated financial statements,
effective January 1, 2007, the Company adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Boston Scientific Corporation’s internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated
February 24, 2009, expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Boston,
Massachusetts
February
24, 2009
75
ITEM
8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
(in
millions, except per share data)
|
Year
Ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
sales
|
$ | 8,050 | $ | 8,357 | $ | 7,821 | ||||||
|
Cost
of products sold
|
2,469 | 2,342 | 2,207 | |||||||||
|
Gross
profit
|
5,581 | 6,015 | 5,614 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Selling,
general and administrative expenses
|
2,589 | 2,909 | 2,675 | |||||||||
|
Research
and development expenses
|
1,006 | 1,091 | 1,008 | |||||||||
|
Royalty
expense
|
203 | 202 | 231 | |||||||||
|
Amortization
expense
|
543 | 620 | 474 | |||||||||
|
Goodwill
and intangible asset impairment charges
|
2,790 | 21 | 56 | |||||||||
|
Acquisition-related
milestone
|
(250 | ) | ||||||||||
|
Purchased
research and development
|
43 | 85 | 4,119 | |||||||||
|
Gain
on divestitures
|
(250 | ) | ||||||||||
|
Loss
on assets held for sale
|
560 | |||||||||||
|
Restructuring
charges
|
78 | 176 | ||||||||||
|
Litigation-related
charges
|
334 | 365 | ||||||||||
| 7,086 | 6,029 | 8,563 | ||||||||||
|
Operating
loss
|
(1,505 | ) | (14 | ) | (2,949 | ) | ||||||
|
Other
income (expense)
|
||||||||||||
|
Interest
expense
|
(468 | ) | (570 | ) | (435 | ) | ||||||
|
Fair-value
adjustment for the sharing of proceeds feature of
the Abbott Laboratories stock purchase
|
(8 | ) | (95 | ) | ||||||||
|
Other,
net
|
(58 | ) | 23 | (56 | ) | |||||||
|
Loss
before income taxes
|
(2,031 | ) | (569 | ) | (3,535 | ) | ||||||
|
Income
tax expense (benefit)
|
5 | (74 | ) | 42 | ||||||||
|
Net
loss
|
$ | (2,036 | ) | $ | (495 | ) | $ | (3,577 | ) | |||
|
Net
loss per common share
|
||||||||||||
|
Basic
|
$ | (1.36 | ) | $ | (0.33 | ) | $ | (2.81 | ) | |||
|
Assuming
dilution
|
$ | (1.36 | ) | $ | (0.33 | ) | $ | (2.81 | ) | |||
|
Weighted-average
shares outstanding:
|
||||||||||||
|
Basic
|
1,498.5 | 1,486.9 | 1,273.7 | |||||||||
|
Assuming
dilution
|
1,498.5 | 1,486.9 | 1,273.7 | |||||||||
(See
notes to the consolidated financial statements)
76
CONSOLIDATED BALANCE
SHEETS
|
As
of December 31,
|
||||||||
|
(in
millions)
|
2008
|
2007
|
||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,641 | $ | 1,452 | ||||
|
Trade
accounts receivable, net
|
1,402 | 1,502 | ||||||
|
Inventories
|
853 | 725 | ||||||
|
Deferred
income taxes
|
911 | 679 | ||||||
|
Assets
held for sale
|
13 | 1,119 | ||||||
|
Prepaid
expenses and other current assets
|
632 | 464 | ||||||
|
Total
current assets
|
$ | 5,452 | $ | 5,941 | ||||
|
Property,
plant and equipment, net
|
1,728 | 1,715 | ||||||
|
Investments
|
113 | 317 | ||||||
|
Other
assets
|
181 | 157 | ||||||
|
Intangible
assets
|
||||||||
|
Goodwill
|
12,421 | 15,103 | ||||||
|
Core
and developed technology, net
|
6,363 | 6,978 | ||||||
|
Patents,
net
|
300 | 322 | ||||||
|
Other
intangible assets, net
|
581 | 664 | ||||||
|
Total
intangible assets
|
19,665 | 23,067 | ||||||
|
Total
assets
|
$ | 27,139 | $ | 31,197 | ||||
(See
notes to the consolidated financial statements)
77
CONSOLIDATED BALANCE
SHEETS
|
As
of December 31,
|
||||||||
|
(in
millions, except share data)
|
2008
|
2007
|
||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Current
debt obligations
|
$ | 2 | $ | 256 | ||||
|
Accounts
payable
|
239 | 139 | ||||||
|
Accrued
expenses
|
2,612 | 2,541 | ||||||
|
Income
taxes payable
|
161 | 122 | ||||||
|
Liabilities
associated with assets held for sale
|
39 | |||||||
|
Other
current liabilities
|
219 | 153 | ||||||
|
Total
current liabilities
|
$ | 3,233 | $ | 3,250 | ||||
|
Long-term
debt
|
6,743 | 7,933 | ||||||
|
Deferred
income taxes
|
2,262 | 2,284 | ||||||
|
Other
long-term liabilities
|
1,727 | 2,633 | ||||||
|
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 1,501,635,679 at December
31, 2008 and 1,491,234,911 shares
at December 31, 2007
|
15 | 15 | ||||||
|
Additional
paid-in capital
|
15,944 | 15,788 | ||||||
|
Deferred
cost, ESOP
|
(22 | ) | ||||||
|
Retained
deficit
|
(2,732 | ) | (693 | ) | ||||
|
Accumulated
other comprehensive income (loss), net of tax
|
||||||||
|
Foreign
currency translation adjustment
|
(13 | ) | 54 | |||||
|
Unrealized
gain on available-for-sale securities
|
16 | |||||||
|
Unrealized
loss on derivative financial instruments
|
(26 | ) | (59 | ) | ||||
|
Unrealized
costs associated with certain retirement plans
|
(14 | ) | (2 | ) | ||||
|
Total
stockholders’ equity
|
13,174 | 15,097 | ||||||
| $ | 27,139 | $ | 31,197 | |||||
(See
notes to the consolidated financial statements)
78
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY (in millions, except share data)
|
Common
Stock
|
Additional
Paid-In
|
Deferred
|
Deferred
Cost, ESOP
|
Treasury
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
|
Comprehensive
Income
|
|||||||||||||||||||||||||||||||||
|
Shares
Issued
|
Par
Value
|
Capital
|
Compensation
|
Shares
|
Amount
|
Stock
|
(Deficit)
|
Income
(Loss)
|
(Loss)
|
|||||||||||||||||||||||||||||||
|
Balance
at January 1, 2006
|
844,565,292 | $ | 8 | $ | 1,658 | $ | (98 | ) | $ | (717 | ) | $ | 3,410 | $ | 21 | |||||||||||||||||||||||||
|
Comprehensive
income
|
||||||||||||||||||||||||||||||||||||||||
|
Net
loss
|
(3,577 | ) | $ | (3,577 | ) | |||||||||||||||||||||||||||||||||||
|
Other
comprehensive income (loss), net of tax
|
||||||||||||||||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
87 | 87 | ||||||||||||||||||||||||||||||||||||||
|
Net
change in available-for-sale investments
|
(10 | ) | (10 | ) | ||||||||||||||||||||||||||||||||||||
|
Net
change in derivative financial instruments
|
(35 | ) | (35 | ) | ||||||||||||||||||||||||||||||||||||
|
Net
change in certain retirement amounts
|
(6 | ) | (6 | ) | ||||||||||||||||||||||||||||||||||||
|
Issuance
of shares of common stock for Guidant acquisition
|
577,206,996 | 6 | 12,508 | |||||||||||||||||||||||||||||||||||||
|
Conversion
of outstanding Guidant stock options
|
450 | |||||||||||||||||||||||||||||||||||||||
|
Issuance
of shares of common stock to Abbott
|
64,631,157 | 1 | 1,399 | |||||||||||||||||||||||||||||||||||||
|
Impact
of stock-based compensation plans, net of tax
|
(214 | ) | 98 | 383 | ||||||||||||||||||||||||||||||||||||
|
Step-up
accounting adjustment for certain investments
|
(7 | ) | ||||||||||||||||||||||||||||||||||||||
|
Acquired
401(k) ESOP for legacy Guidant employees
|
3,794,965 | $ | (86 | ) | ||||||||||||||||||||||||||||||||||||
|
401(k)
ESOP transactions
|
(9 | ) | (1,237,662 | ) | 28 | |||||||||||||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
1,486,403,445 | $ | 15 | $ | 15,792 | $ | — | 2,557,303 | $ | (58 | ) | $ | (334 | ) | $ | (174 | ) | $ | 57 | $ | (3,541 | ) | ||||||||||||||||||
|
Comprehensive
income
|
||||||||||||||||||||||||||||||||||||||||
|
Net
loss
|
(495 | ) | $ | (495 | ) | |||||||||||||||||||||||||||||||||||
|
Other
comprehensive income (loss), net of tax
|
||||||||||||||||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
38 | 38 | ||||||||||||||||||||||||||||||||||||||
|
Net
change in derivative financial instruments
|
(91 | ) | (91 | ) | ||||||||||||||||||||||||||||||||||||
|
Net
change in certain retirement amounts
|
5 | 5 | ||||||||||||||||||||||||||||||||||||||
| Cumulative
effect adjustment for adoption of
Interpretation
No. 48
|
(26 | ) | ||||||||||||||||||||||||||||||||||||||
|
Common
stock issued for acquisitions
|
(52 | ) | 142 | |||||||||||||||||||||||||||||||||||||
|
Impact
of stock-based compensation plans, net of tax
|
4,831,466 | 61 | 192 | |||||||||||||||||||||||||||||||||||||
|
401(k)
ESOP transactions
|
(13 | ) | (1,605,737 | ) | 36 | |||||||||||||||||||||||||||||||||||
|
Other
|
2 | |||||||||||||||||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
1,491,234,911 | $ | 15 | $ | 15,788 | 951,566 | $ | (22 | ) | $ | — | $ | (693 | ) | $ | 9 | $ | (543 | ) | |||||||||||||||||||||
|
Comprehensive
income
|
||||||||||||||||||||||||||||||||||||||||
|
Net
loss
|
(2,036 | ) | $ | (2,036 | ) | |||||||||||||||||||||||||||||||||||
|
Other
comprehensive income (loss), net of tax
|
||||||||||||||||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
(67 | ) | (67 | ) | ||||||||||||||||||||||||||||||||||||
|
Net
change in available-for-sale investments
|
(16 | ) | (16 | ) | ||||||||||||||||||||||||||||||||||||
|
Net
change in derivative financial instruments
|
33 | 33 | ||||||||||||||||||||||||||||||||||||||
|
Net
change in certain retirement amounts
|
(12 | ) | (12 | ) | ||||||||||||||||||||||||||||||||||||
|
Impact
of stock-based compensation plans, net of tax
|
10,400,768 | 166 | ||||||||||||||||||||||||||||||||||||||
|
401(k)
ESOP transactions
|
(10 | ) | (951,566 | ) | 22 | |||||||||||||||||||||||||||||||||||
|
Other
|
(3 | ) | ||||||||||||||||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
1,501,635,679 | $ | 15 | $ | 15,944 | — | $ | — | $ | (2,732 | ) | $ | (53 | ) | $ | (2,098 | ) | |||||||||||||||||||||||
(See
notes to the consolidated financial statements)
79
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
Ended December 31,
|
||||||||||||
|
in
millions
|
2008
|
2007
|
2006
|
|||||||||
|
Operating
Activities
|
||||||||||||
|
Net
loss
|
$ | (2,036 | ) | $ | (495 | ) | $ | (3,577 | ) | |||
|
Adjustments
to reconcile net loss to cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
864 | 918 | 725 | |||||||||
|
Deferred
income taxes
|
(334 | ) | (386 | ) | (420 | ) | ||||||
|
Stock-based
compensation expense
|
138 | 122 | 113 | |||||||||
|
Net
loss on investments and notes recievable
|
78 | 54 | 109 | |||||||||
|
Goodwill
and intangible asset impairments
|
2,790 | 21 | 56 | |||||||||
|
Purchased
research and development
|
43 | 85 | 4,119 | |||||||||
|
Gain
on divestitures
|
(250 | ) | ||||||||||
|
Loss
on assets held for sale
|
560 | |||||||||||
|
Fair-value
adjustment for sharing of proceeds feature of Abbott stock
purchase
|
8 | 95 | ||||||||||
|
Step-up
value of acquired inventory sold
|
267 | |||||||||||
|
Increase
(decrease) in cash flows from operating assets and liabilities,
excluding the effect of acquisitions and assets held for
sale:
|
||||||||||||
|
Trade
accounts receivable
|
96 | (72 | ) | 64 | ||||||||
|
Inventories
|
(120 | ) | (30 | ) | (53 | ) | ||||||
|
Prepaid
expenses and other assets
|
(21 | ) | (43 | ) | 79 | |||||||
|
Accounts
payable and accrued expenses
|
392 | 45 | (1 | ) | ||||||||
|
Income
taxes payable and other liabilities
|
(416 | ) | 125 | 234 | ||||||||
|
Other,
net
|
(8 | ) | 22 | 35 | ||||||||
|
Cash
provided by operating activities
|
1,216 | 934 | 1,845 | |||||||||
|
Investing
Activities
|
||||||||||||
|
Property,
plant and equipment
|
||||||||||||
|
Purchases
|
(362 | ) | (363 | ) | (341 | ) | ||||||
|
Proceeds
on disposals
|
2 | 30 | 18 | |||||||||
|
Acquisitions
|
||||||||||||
|
Payments
for acquisitions of businesses, net of cash acquired
|
(21 | ) | (13 | ) | (8,686 | ) | ||||||
|
Payments
relating to prior period acquisitions
|
(675 | ) | (248 | ) | (397 | ) | ||||||
|
Other
investing activity
|
||||||||||||
|
Proceeds
from business divestitures
|
1,287 | |||||||||||
|
Payments
for investments in privately held companies and acquisitions of certain
technologies
|
(56 | ) | (123 | ) | (98 | ) | ||||||
|
Proceeds
from sales of investments in, and collections of notes receivable from,
investment portfolio companies
|
149 | 243 | 33 | |||||||||
|
Proceeds
from maturities of marketable securities
|
159 | |||||||||||
|
Cash
provided by (used for) investing activities
|
324 | (474 | ) | (9,312 | ) | |||||||
|
Financing
Activities
|
||||||||||||
|
Debt
|
||||||||||||
|
Payments
on notes payable, capital leases and long-term borrowings
|
(1,175 | ) | (1,000 | ) | (1,510 | ) | ||||||
|
Net
(payments on) proceeds from borrowings on credit and security
facilities
|
(250 | ) | 246 | 3 | ||||||||
|
Proceeds
from notes payable and long-term borrowings, net of debt issuance
costs
|
8,544 | |||||||||||
|
Net
payments on commercial paper
|
(149 | ) | ||||||||||
|
Equity
|
||||||||||||
|
Proceeds
from issuances of shares of common stock
|
71 | 132 | 145 | |||||||||
|
Excess
tax benefit relating to stock options
|
4 | 2 | 7 | |||||||||
|
(Payments)
proceeds related to issuance of shares of common stock to
Abbott
|
(60 | ) | 1,400 | |||||||||
|
Other,
net
|
(1 | ) | ||||||||||
|
Cash
(used for) provided by financing activities
|
(1,350 | ) | (680 | ) | 8,439 | |||||||
|
Effect
of foreign exchange rates on cash
|
(1 | ) | 4 | 7 | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
189 | (216 | ) | 979 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
1,452 | 1,668 | 689 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 1,641 | $ | 1,452 | $ | 1,668 | ||||||
80
|
Year
Ended December 31,
|
||||||||||||
|
SUPPLEMENTAL
INFORMATION:
|
2008
|
2007
|
2006
|
|||||||||
|
Cash
paid for income taxes
|
$ | 468 | $ | 475 | $ | 199 | ||||||
|
Cash
paid for interest
|
414 | 543 | 383 | |||||||||
|
Non-cash investing
activities:
|
||||||||||||
|
Stock
and stock equivalents issued for acquisitions
|
$ | 90 | $ | 12,964 | ||||||||
|
Non-cash financing
activities:
|
||||||||||||
|
Capital
lease arrangements
|
$ | 31 | ||||||||||
(See
notes to the consolidated financial statements)
81
Principles
of Consolidation
Our
consolidated financial statements include the accounts of Boston Scientific
Corporation and our subsidiaries, all of which we wholly own. We consider the
principles of Financial Accounting Standards Board (FASB) Interpretation
No. 46(R), Consolidation
of Variable Interest Entities; Accounting Research Bulletin No. 51,
Consolidation of Financial
Statements, and FASB Statement No. 94, Consolidation of All Majority-Owned
Subsidiaries, when evaluating whether an entity is subject to
consolidation. We assess the terms of our investment interests in entities to
determine if any of our investees meet the definition of a variable interest
entity (VIE) under Interpretation No. 46(R). We consolidate any VIEs in which we
are the primary beneficiary. Our evaluation considers both qualitative and
quantitative factors and various assumptions, including expected losses and
residual returns. As of December 31, 2008, we did not consolidate any VIEs. We
account for investments in companies over which we have the ability to exercise
significant influence under the equity method if we hold 50 percent or less
of the voting stock.
In the
first quarter of 2008, we completed the divestiture of certain non-strategic
businesses. Our operating results for the years ended December 31, 2007 and 2006
include a full year of results of these businesses. Our operating results for
the year ended December 31, 2008 include the results of these businesses through
the date of separation. Refer to Note F – Divestitures and Assets
Held for Sale for a description of these business
divestitures.
On April
21, 2006, we consummated the acquisition of Guidant Corporation. Our operating
results for the years ended December 31, 2008 and 2007 each include a full year
of results of our cardiac rhythm management (CRM) business that we acquired from
Guidant. Our operating results for the year ended December 31, 2006 include the
results of the CRM business beginning on the date of acquisition. Refer to Note D- Acquisitions for further
details on the Guidant acquisition, as well as supplemental pro forma financial
information which gives effect to the acquisition as though it had occurred at
the beginning of 2006.
Reclassifications
We have
reclassified certain prior year amounts to conform to the current year’s
presentation, including amounts for prior years included in our consolidated
statements of operations with respect to intangible asset impairment charges,
and amounts included in our consolidated balance sheets with respect to assets
held for sale, as well as within Note P – Segment
Reporting.
Accounting
Estimates
To
prepare our consolidated financial statements in accordance with U.S. generally
accepted accounting principles, management makes estimates and assumptions that
may affect the reported amounts of our assets and liabilities, the disclosure of
contingent assets and liabilities at the date of our financial statements and
the reported amounts of our revenues and expenses during the reporting period.
Our actual results may differ from these estimates.
Cash,
Cash Equivalents and Marketable Securities
We record
cash and cash equivalents in our consolidated balance sheets at cost, which
approximates fair value. We consider all highly liquid investments purchased
with a remaining maturity of three months or less at the time of acquisition to
be cash equivalents.
We record
available-for-sale investments at fair value. We exclude unrealized gains and
temporary losses on available-for-sale securities from earnings and report such
gains and losses, net of tax, as a separate component of stockholders’ equity
until realized. We compute realized gains and losses on sales of
available-for-sale securities based on the average cost method, adjusted for any
other-than-temporary declines in fair
82
value. We
record held-to-maturity securities at amortized cost and adjust for amortization
of premiums and accretion of discounts to maturity. We classify investments in
debt securities or equity securities that have a readily determinable fair value
that we purchase and hold principally for selling them in the near term as
trading securities. All of our cash investments at December 31, 2008 and 2007
had maturity dates at date of purchase of less than three months and,
accordingly, we have classified them as cash and cash equivalents.
Concentrations
of Credit Risk
Financial
instruments that potentially subject us to concentrations of credit risk consist
primarily of cash and cash equivalents, marketable securities, derivative
financial instrument contracts and accounts and notes receivable. Our investment
policy limits exposure to concentrations of credit risk and changes in market
conditions. Counterparties to financial instruments expose us to credit-related
losses in the event of nonperformance. We transact our financial instruments
with a diversified group of major financial institutions and actively monitor
outstanding positions to limit our credit exposure.
We
provide credit, in the normal course of business, to hospitals, healthcare
agencies, clinics, doctors’ offices and other private and governmental
institutions and generally do not require collateral. We perform on-going credit
evaluations of our customers and maintain allowances for potential credit
losses.
Revenue
Recognition
We
generate revenue primarily from the sale of single-use medical devices. We
consider revenue to be realized or realizable and earned when all of the
following criteria are met: persuasive evidence of a sales arrangement exists;
delivery has occurred or services have been rendered; the price is fixed or
determinable; and collectibility is reasonably assured. We generally meet these
criteria at the time of shipment, unless a consignment arrangement exists or we
are required to provide additional services. We recognize revenue from
consignment arrangements based on product usage, or implant, which indicates
that the sale is complete. For our other transactions, we recognize revenue when
our products are delivered and risk of loss transfers to the customer, provided
there are no substantive remaining performance obligations required of us
or any matters requiring customer acceptance, and provided we can form an
estimate for sales returns. For multiple-element arrangements, where the sale of
devices is combined with future service obligations, as with our LATITUDE®
Patient Management System, we defer revenue on the undelivered element based on
verifiable objective evidence of fair value, and recognize the associated
revenue over the related service period. We present revenue net of sales taxes
in our consolidated statements of operations.
We
generally allow our customers to return defective, damaged and, in certain
cases, expired products for credit. We base our estimate for sales returns upon
historical trends and record the amount as a reduction to revenue when we
sell the initial product. In addition, we may allow customers to return
previously purchased products for next-generation product offerings; for these
transactions, we defer recognition of revenue based upon an estimate of the
amount of product to be returned when the next-generation products are shipped
to the customer.
We offer
sales rebates and discounts to certain customers. We treat sales rebates and
discounts as a reduction of revenue and classify the corresponding liability as
current. We estimate rebates for products where there is sufficient historical
information available to predict the volume of expected future rebates. If we
are unable to estimate the expected rebates reasonably, we record a liability
for the maximum rebate percentage offered. We have entered certain agreements
with group purchasing organizations to sell our products to participating
hospitals at negotiated prices. We recognize revenue from these agreements
following the same revenue recognition criteria discussed above.
Inventories
We state
inventories at the lower of first-in, first-out cost or market. We base our
provisions for excess and obsolete inventory primarily on our estimates of
forecasted net sales. A significant change in the timing or
83
level of
demand for our products as compared to forecasted amounts may result in
recording additional provisions for excess and obsolete inventory in the future.
The industry in which we participate is characterized by rapid product
development and frequent new product introductions. Uncertain timing of
next-generation product approvals, variability in product launch strategies,
product recalls and variation in product utilization all affect our estimates
related to excess and obsolete inventory. We record provisions for inventory
located in our manufacturing and distribution facilities as cost of products
sold. We charge consignment inventory write-downs to selling, general and
administrative (SG&A) expense. These write-downs were $16 million in 2008,
$35 million in 2007, and $24 million in 2006. Inventories under consignment
arrangements were $121 million at December 31, 2008 and $78 million at December
31, 2007.
Property,
Plant and Equipment
We state
property, plant, equipment, and leasehold improvements at historical cost. We
charge expenditures for maintenance and repairs to expense and capitalize
additions and improvements. We generally provide for depreciation using the
straight-line method at rates that approximate the estimated useful lives of the
assets. We depreciate buildings and improvements over a 20 to 40 year life;
equipment, furniture and fixtures over a three to seven year life; and
leasehold improvements over the shorter of the useful life of the improvement or
the term of the lease. We present assets under capital lease arrangements with
property, plant and equipment in the accompanying consolidated balance
sheets.
Valuation
of Business Combinations
We record
intangible assets acquired in business combinations under the purchase method of
accounting. We allocate the amounts we pay for each acquisition to the assets we
acquire and liabilities we assume based on their fair values at the dates of
acquisition in accordance with FASB Statement No. 141, Business Combinations,
including identifiable intangible assets and purchased research and development
which either arise from a contractual or legal right or are separable from
goodwill. We base the fair value of identifiable intangible assets and purchased
research and development on detailed valuations that use information and
assumptions provided by management. We allocate any excess purchase price over
the fair value of the net tangible and identifiable intangible assets acquired
to goodwill. The use of alternative valuation assumptions, including estimated
cash flows and discount rates, and alternative estimated useful life assumptions
could result in different purchase price allocations, purchased research and
development charges, and intangible asset amortization expense in current and
future periods.
In
circumstances where the amounts assigned to assets acquired and liabilities
assumed exceeds the cost of the acquired entity and the purchase agreement does
not provide for contingent consideration that might result in an additional
element of cost of the acquired entity that equals or exceeds the excess of fair
value over cost, the excess is allocated as a pro rata reduction of the amounts
that otherwise would have been assigned to all of the acquired assets, including
purchased research and development, except for a) financial assets other than
investments accounted for under the equity method, b) assets to be disposed of
by sale, c) deferred tax assets, d) prepaid assets relating to pension or other
postretirement benefit plans and e) any other current assets. In
those circumstances where an acquisition involves contingent consideration, we
recognize an amount equal to the lesser of the maximum amount of the contingent
payment or the excess of fair value over cost as a
liability.
Purchased
Research and Development
Our
purchased research and development represents the value of acquired in-process
projects that have not yet reached technological feasibility and have no
alternative future uses as of the date of acquisition. The primary basis for
determining the technological feasibility of these projects is obtaining
regulatory approval to market the underlying products in an applicable
geographic region. Through December 31, 2008, we have expensed the value
attributable to these in-process projects at the time of the acquisition in
accordance with accounting standards effective through that date. If the
projects are not successful or completed in a timely manner, we may not realize
the financial benefits expected for these projects or for the acquisition as a
whole. In addition, we record certain costs associated with our alliances as
purchased research and development.
84
We use
the income approach to determine the fair values of our purchased research and
development. This approach calculates fair value by estimating the after-tax
cash flows attributable to an in-process project over its useful life and then
discounting these after-tax cash flows back to a present value. We base our
revenue assumptions on estimates of relevant market sizes, expected market
growth rates, expected trends in technology and expected levels of market share.
In arriving at the value of the in-process projects, we consider, among other
factors: the in-process projects’ stage of completion; the complexity of the
work completed as of the acquisition date; the costs already incurred; the
projected costs to complete; the contribution of core technologies and other
acquired assets; the expected introduction date; and the estimated useful life
of the technology. We base the discount rate used to arrive at a present value
as of the date of acquisition on the time value of money and medical technology
investment risk factors. For the in-process projects acquired in connection with
our recent acquisitions, we used the following ranges of risk-adjusted discount
rates to discount our projected cash flows: 34 percent in 2008, 19 percent in
2007, and 13 percent to 17 percent in 2006. We believe that the estimated
in-process research and development amounts so determined represent the fair
value at the date of acquisition and do not exceed the amount a third party
would pay for the projects.
Amortization
and Impairment of Intangible Assets
We record
intangible assets at historical cost and amortize them over their estimated
useful lives. We use a straight-line method of amortization, unless a
method that better reflects the pattern in which the economic benefits of the
intangible asset are consumed or otherwise used up can be reliably determined.
The approximate useful lives for amortization of our intangible assets is as
follows: patents and licenses, two to 20 years; definite-lived core and
developed technology, five to 25 years; customer relationships, five to 25
years; other intangible assets, various.
We review
intangible assets subject to amortization quarterly to determine if any adverse
conditions exist or a change in circumstances has occurred that would indicate
impairment or a change in the remaining useful life. Conditions that may
indicate impairment include, but are not limited to, a significant adverse
change in legal factors or business climate that could affect the value of an
asset, a product recall, or an adverse action or assessment by a regulator. If
an impairment indicator exists, we test the intangible asset for
recoverability. For purposes of the recoverability test, we group our
intangible assets with other assets and liabilities at the lowest level of
identifiable cash flows if the intangible asset does not generate cash flows
independent of other assets and liabilities. If the carrying value of the
intangible asset (asset group) exceeds the undiscounted cash flows expected to
result from the use and eventual disposition of the intangible asset (asset
group), we will write the carrying value down to the fair
value in the period identified. In addition, we review our indefinite-lived
intangible assets at least annually for impairment and reassess their
classification as indefinite-lived assets. To test for impairment, we calculate
the fair value of our indefinite-lived intangible assets and compare the
calculated fair values to the respective carrying values. If the
carrying value exceeds the fair value of the indefinite-lived intangible asset,
the carrying value is written down to the fair value.
We
generally calculate fair value of our intangible assets as the present value of
estimated future cash flows we expect to generate from the asset using a
risk-adjusted discount rate. In determining our estimated future cash
flows associated with our intangible assets, we use estimates
and assumptions about future revenue contributions, cost structures and
remaining useful lives of the asset (asset group). The use of alternative
assumptions, including estimated cash flows, discount rates, and alternative
estimated remaining useful lives could result in different
calculations of impairment. See Note E - Goodwill and
Other Intangible Assets for more information related to impairment
of intangible assets during 2008, 2007 and 2006.
For
patents developed internally, we capitalize costs incurred to obtain patents,
including attorney fees, registration fees, consulting fees, and other
expenditures directly related to securing the patent. We amortize these costs
generally over a period of 17 years utilizing the straight-line method,
commencing when the related patent is issued. Legal costs incurred in connection
with the successful defense of both internally developed patents and those
obtained through our acquisitions are capitalized and amortized over the
remaining amortizable life of the related patent.
85
Goodwill
Impairment
We test
our goodwill balances as of April 1 during the second quarter of each year for
impairment. We test our goodwill balances more frequently if indicators are
present or changes in circumstances suggest that impairment may exist. In
performing the test, we utilize the two-step approach prescribed under FASB
Statement No. 142, Goodwill and Other Intangible
Assets. The first step requires a comparison of the carrying value of the
reporting units, as defined, to the fair value of these units. We have
identified our domestic divisions, which in aggregate make up the U.S.
reportable segment, and our two international operating segments as our
reporting units for purposes of the goodwill impairment test. To
derive the carrying value of our reporting units at the time of acquisition, we
assign goodwill to the reporting units that we expect to benefit from the
respective business combination. In addition, for purposes of performing our
annual goodwill impairment test, assets and liabilities, including corporate
assets, which relate to a reporting unit’s operations, and would be considered
in determining fair value, are allocated to the individual reporting units. We
allocate assets and liabilities not directly related to a specific reporting
unit, but from which the reporting unit benefits, based primarily on the
respective revenue contribution of each reporting unit. If the carrying value of
a reporting unit exceeds its fair value, we will perform the second step of the
goodwill impairment test to measure the amount of impairment loss, if
any.
The
second step of the goodwill impairment test compares the implied fair value of a
reporting unit’s goodwill to its carrying value. If we were unable to complete
the second step of the test prior to the issuance of our financial statements
and an impairment loss was probable and could be reasonably estimated, we would
recognize our best estimate of the loss in our current period financial
statements and disclose that the amount is an estimate. We would then
recognize any adjustment to that estimate in subsequent reporting periods, once
we have finalized the second step of the impairment test.
During
the fourth quarter of 2008, we recorded a $2.613 billion goodwill impairment
charge associated with our acquisition of Guidant. The decline in our stock
price and our market capitalization during the fourth quarter created an
indication of potential impairment of our goodwill balance; therefore, we
performed an interim impairment test. Key factors contributing to the impairment
charge included disruptions in the credit and equity market, and the resulting
impacts to weighted-average costs of capital, and changes in CRM market demand
relative to our original assumptions at the time of the acquisition. Refer to
Note E – Goodwill and Other
Intangible Assets for more information.
Investments
in Publicly Traded and Privately Held Entities
We
account for our publicly traded investments as available-for-sale securities
based on the quoted market price at the end of the reporting period. We compute
realized gains and losses on sales of available-for-sale securities based on the
average cost method, adjusted for any other-than-temporary declines in fair
value. We account for our investments for which fair value is not readily
determinable in accordance with Accounting Principles Board (APB) Opinion
No. 18, The Equity Method
of Accounting for Investments in Common Stock, Emerging Issues Task Force
(EITF) Issue No. 02-14, Whether an Investor Should Apply the
Equity Method of Accounting to Investments other than Common Stock and
FASB Staff Position Nos. 115-1 and 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.
We
account for investments in entities over which we have the ability to exercise
significant influence under the equity method if we hold 50 percent or less
of the voting stock and the entity is not a variable interest entity in which we
are the primary beneficiary. We account for investments in entities over which
we do not have the ability to exercise significant influence under the cost
method. Our determination of whether we have the ability to exercise significant
influence over an entity requires judgment. We consider the guidance
in Opinion No. 18, EITF Issue No. 03-16, Accounting for Investments in
Limited Liability Companies, and EITF Topic D-46, Accounting for Limited Partnership
Investments, in determining whether we have the ability to exercise
significant influence over an entity.
86
For
investments accounted for under the equity method, we record the investment
initially at cost, and adjust the carrying amount to reflect our share of the
earnings or losses of the investee, including all adjustments similar to those
made in preparing consolidated financial statements.
Each
reporting period, we evaluate our investments to determine if there are any
events or circumstances that are likely to have a significant adverse effect on
the fair value of the investment. Examples of such impairment indicators
include, but are not limited to: a significant deterioration in earnings
performance; recent financing rounds at reduced valuations; a significant
adverse change in the regulatory, economic or technological environment of an
investee; or a significant doubt about an investee’s ability to continue as a
going concern. If we identify an impairment indicator, we will estimate the fair
value of the investment and compare it to its carrying value. Our estimation of
fair value considers all available financial information related to the
investee, including valuations based on recent third-party equity investments in
the investee. If the fair value of the investment is less than its carrying
value, the investment is impaired and we make a determination as to whether the
impairment is other-than-temporary. We deem impairment to be
other-than-temporary unless we have the ability and intent to hold an investment
for a period sufficient for a market recovery up to the carrying value of the
investment. Further, evidence must indicate that the carrying value of the
investment is recoverable within a reasonable period. For other-than-temporary
impairments, we recognize an impairment loss equal to the difference between an
investment’s carrying value and its fair value. Impairment losses on our
investments are included in other, net in our consolidated statements of
operations.
Income
Taxes
We
utilize the asset and liability method of accounting for income taxes. Under
this method, we determine deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of our assets and
liabilities. We measure deferred tax assets and liabilities using the enacted
tax rates and laws that will be in effect when we expect the differences to
reverse.
We
recognized net deferred tax liabilities of $1.351 billion at December 31, 2008
and $1.605 billion at December 31, 2007. The liabilities relate primarily
to deferred taxes associated with our acquisitions. The assets relate primarily
to the establishment of inventory and product-related reserves, litigation and
product liability reserves, purchased research and development, investment
write-downs, net operating loss carryforwards and tax credit carryforwards. In
light of our historical financial performance, we believe we will recover
substantially all of these assets. We reduce our deferred tax assets by a
valuation allowance if, based upon the weight of available evidence, it is more
likely than not that we will not realize some portion or all of the deferred tax
assets. We consider relevant evidence, both positive and negative, to determine
the need for a valuation allowance. Information evaluated includes our financial
position and results of operations for the current and preceding years, as well
as an evaluation of currently available information about future
years.
We do not
provide income taxes on unremitted earnings of our foreign subsidiaries where we
have indefinitely reinvested such earnings in our foreign operations. It is not
practical to estimate the amount of income taxes payable on the earnings that
are indefinitely reinvested in foreign operations. Unremitted earnings of our
foreign subsidiaries that we have indefinitely reinvested offshore are $9.327
billion at December 31, 2008 and $7.804 billion at December 31,
2007.
We
provide for potential amounts due in various tax jurisdictions. In the ordinary
course of conducting business in multiple countries and tax jurisdictions, there
are many transactions and calculations where the ultimate tax outcome is
uncertain. Judgment is required in determining our worldwide income tax
provision. In our opinion, we have made adequate provisions for income taxes for
all years subject to audit. Although we believe our estimates are reasonable, we
can make no assurance that the final tax outcome of these matters will not be
different from that which we have reflected in our historical income tax
provisions and accruals. Such differences could have a material impact on our
income tax provision and operating results in the period in which we make such
determination.
87
Legal,
Product Liability Costs and Securities Claims
We are
involved in various legal and regulatory proceedings, including intellectual
property, breach of contract, securities litigation and product liability suits.
In some cases, the claimants seek damages, as well as other relief, which, if
granted, could require significant expenditures or impact our ability to sell
our products. We are substantially self-insured with respect to product
liability claims. We maintain insurance policies providing limited coverage
against securities claims. We generally record losses for claims in excess of
purchased insurance in earnings at the time and to the extent they are probable
and estimable. In accordance with FASB Statement No. 5, Accounting for
Contingencies, we accrue anticipated costs of settlement, damages, losses
for product liability claims and, under certain conditions, costs of defense,
based on historical experience or to the extent specific losses are probable and
estimable. Otherwise, we expense these costs as incurred. 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. See Note L - Commitments and
Contingencies for further discussion of our individual material legal
proceedings.
Warranty
Obligations
We
estimate the costs that we may incur under our warranty programs based on
historical experience and record a liability at the time our products are sold.
Factors that affect our warranty liability include the number of units sold, the
historical and anticipated rates of warranty claims and the cost per claim. We
record a reserve equal to the costs to repair or otherwise satisfy the claim. We
regularly assess the adequacy of our recorded warranty liabilities and adjust
the amounts as necessary. Changes in our product warranty obligations during
2008 consisted of the following (in millions):
|
Balance
as of December 31, 2007
|
$ | 66 | ||
|
Warranty
claims provision
|
35 | |||
|
Settlements
made
|
(39 | ) | ||
|
Balance
as of December 31, 2008
|
$ | 62 | ||
Costs
Associated with Exit Activities
We record
employee termination costs in accordance with FASB Statement No. 112, Employer’s Accounting for
Postemployment Benefits, if we pay the benefits as part of an on-going
benefit arrangement, which includes benefits provided as part of our domestic
severance policy or that we provide in accordance with international statutory
requirements. We accrue employee termination costs associated with an on-going
benefit arrangement if the obligation is attributable to prior services
rendered, the rights to the benefits have vested and the payment is probable and
we can reasonably estimate the liability. We account for employee termination
benefits that represent a one-time benefit in accordance with FASB Statement
No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. We record such costs
into expense over the employee’s future service period, if any, in accordance
with the Statement No. 146 criteria. In addition, in conjunction with an exit
activity, we may offer voluntary termination benefits to employees. These
benefits are recorded when the employee accepts the termination benefits and the
amount can be reasonably estimated. Other costs associated with exit activities
may include contract termination costs, including costs related to leased
facilities to be abandoned or subleased, and long-lived asset impairments. In
addition, through December 31, 2008, we have accounted for costs to exit an
activity of an acquired company, costs for involuntary employee termination
benefits and relocation costs associated with acquired businesses in
accordance with EITF Issue No. 95-3, Recognition of Liabilities in
Connection with a Purchase Business
Combination. We include exit costs in the
purchase price allocation of the acquired business if a plan to exit an activity
of an acquired company exists, in accordance with the Issue No. 95-3 criteria,
and if those costs have no future economic benefit to us and will
be incurred as a direct result of the exit plan; or the exit costs represent
amounts to be incurred by us under a contractual obligation of the acquired
entity that existed prior to the acquisition date.
88
Translation
of Foreign Currency
We
translate all assets and liabilities of foreign subsidiaries at the year-end
exchange rate and translate sales and expenses at the average exchange rates in
effect during the year. We show the net effect of these translation adjustments
in the accompanying consolidated financial statements as a component of
stockholders’ equity. Foreign currency transaction gains and losses are included
in other, net in our consolidated statements of operations net of losses and
gains from any related derivative financial instruments. These amounts were not
material to our consolidated statements of operations for 2008, 2007, and
2006.
Financial
Instruments
We
recognize all derivative financial instruments in our consolidated financial
statements at fair value in accordance with FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. We record changes in the fair value
of derivative instruments in earnings unless we meet deferred hedge accounting
criteria. For derivative instruments designated as fair value hedges, we record
the changes in fair value of both the derivative instrument and the hedged item
in earnings. For derivative instruments designated as cash flow hedges, we
record the effective portions of changes in fair value, net of tax, in other
comprehensive income until the related hedged third party transaction occurs.
For derivative instruments designated as net investment hedges, we record the
effective portion of changes in fair value in other comprehensive income as part
of the cumulative translation adjustment. We recognize any ineffective portion
of our hedges in earnings.
Shipping
and Handling Costs
We
generally do not bill customers for shipping and handling of our products.
Shipping and handling costs of $72 million in 2008, $79 million in 2007, and
$85 million in 2006 are included in selling, general and administrative
expenses in the accompanying consolidated statements of operations.
Research
and Development
We
expense research and development costs, including new product development
programs, regulatory compliance and clinical research as incurred. Refer to
Purchased Research and
Development for our policy regarding in-process research and development
acquired in connection with our business combinations.
Employee
Retirement Plans
Defined Benefit
Plans
In
connection with our acquisition of Guidant, we sponsor the Guidant Retirement
Plan, a frozen noncontributory defined benefit plan covering a select group of
current and former employees. The funding policy for the plan is consistent with
U.S. employee benefit and tax-funding regulations. Plan assets, which we
maintain in a trust, consist primarily of equity and fixed-income instruments.
We also sponsor the Guidant Excess Benefit Plan, a frozen nonqualified plan for
certain former officers and employees of Guidant. The Guidant Excess Benefit
Plan was funded through a Rabbi Trust that contains segregated company assets
used to pay the benefit obligations related to the plan. In addition, certain
current and former U.S. and Puerto Rico employees of Guidant are eligible to
receive a portion of their healthcare retirement benefits under a frozen defined
benefit plan.
89
We
maintain an Executive Retirement Plan, which covers executive officers and
division presidents. The plan provides retiring executive officers and division
presidents with a lump sum benefit of 1.5 to 2.5 months of salary for each
completed year of service, up to a maximum of 36 months’ pay for executive
officers and 24 months’ pay for division presidents. Participants may retire
with unreduced benefits once retirement conditions have been satisfied. In order
to meet the retirement definition under the Executive Retirement Plan, an
employee’s age in addition to his or her years of service with Boston Scientific
must be at least 65 years, the employee must be at least
55 years old and have been with Boston Scientific for at least
five years. In addition, we maintain defined benefit retirement plans
covering certain international employees.
In
accordance with FASB Statement No. 158, Employer’s Accounting for Defined
Benefit Pension and Other Postretirement Plans, we use a December 31
measurement date for these plans and record the underfunded portion as a
liability, and recognize changes in the funded status through
other comprehensive income. The outstanding obligation as of December 31,
2008 is as follows:
|
(in
millions)
|
Projected
Benefit
Obligation
(PBO)
|
Less:
Fair
value of
Plan
Assets
|
Underfunded
PBO Recognized
|
|||||||||
|
Executive
Retirement Plan
|
$ | 16 | $ | 16 | ||||||||
|
Guidant
Retirement Plan (frozen)
|
90 | $ | 54 | 36 | ||||||||
|
Guidant
Excess Benefit Plan (frozen)
|
28 | 28 | ||||||||||
|
Guidant
Healthcare Retirement Benefit Plan (frozen)
|
15 | 15 | ||||||||||
|
International
Retirement Plans
|
52 | 22 | 30 | |||||||||
| $ | 201 | $ | 76 | $ | 125 | |||||||
The net
decrease in the funded status of our plans at December 31, 2008, as compared to
December 31, 2007, reported as a reduction to accumulated other comprehensive
income was $12 million.
The
weighted average assumptions used to determine benefit obligations at December
31, 2008 are as follows:
|
Discount
Rate
|
Expected
Return
on
Plan Assets
|
Healthcare
Cost
Trend
Rate
|
Rate
of
Compensation
Increase
|
|
|
Executive
Retirement Plan
|
6.25%
|
4.50%
|
||
|
Guidant
Retirement Plan (frozen)
|
6.25%
|
7.75%
|
||
|
Guidant
Excess Benefit Plan (frozen)
|
6.25%
|
|||
|
Healthcare
Retirement Benefit Plan (frozen)
|
6.00%
|
5.00%
|
||
|
International
Retirement Plans
|
2.00%
- 6.00%
|
2.00%
- 4.10%
|
3.00%
- 5.40%
|
Defined Contribution
Plans
We
sponsor a voluntary 401(k) Retirement Savings Plan for eligible employees.
Participants may contribute between one percent and twenty-five percent of his
or her compensation on an pre-tax basis, and between one percent and ten percent
on an after-tax basis, up to established federal limits. We match employee
contributions equal to 200 percent for employee contributions up to two percent
of employee compensation, and fifty percent for employee contributions greater
than two percent, but not exceeding six percent, of pre-tax employee
compensation. Participants age 50 and older may also contribute up to an
additional $5,000 per year in pre-tax contributions, which we do not match.
Total expense for our matching contributions to the plan was $63 million in
2008, $64 million in 2007, and $48 million in 2006.
90
In
connection with our acquisition of Guidant, we sponsored the Guidant Employee
Savings and Stock Ownership Plan, which allowed for employee contributions of a
percentage of pre-tax earnings, up to established federal limits. Our
matching contributions to the plan were in the form of shares of stock,
allocated from the Employee Stock Ownership Plan (ESOP). Refer to Note N – Stock Ownership Plans
for more information on the ESOP. Total expense for our matching
contributions to the plan was $12 million in 2008, $23 million in 2007 and $19
million in 2006. Effective June 1, 2008, this plan was merged into our 401(k)
Retirement Savings Plan.
Net
Income (Loss) per Common Share
We base
net income (loss) per common share upon the weighted-average number of common
shares and common stock equivalents outstanding each year. Potential common
stock equivalents are determined using the treasury stock method. We exclude
stock options whose effect would be anti-dilutive from the
calculation.
Note B—Supplemental
Balance Sheet Information
Components
of selected captions in our accompanying consolidated balance sheets are as
follows:
|
As
of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Trade
accounts receivable, net
|
||||||||
|
Accounts
receivable
|
$ | 1,533 | $ | 1,639 | ||||
|
Less:
allowances
|
131 | 137 | ||||||
| $ | 1,402 | $ | 1,502 | |||||
|
Inventories
|
||||||||
|
Finished
goods
|
$ | 555 | $ | 454 | ||||
|
Work-in-process
|
135 | 132 | ||||||
|
Raw
materials
|
163 | 139 | ||||||
| $ | 853 | $ | 725 | |||||
Sales
of the PROMUS® everolimus-eluting stent systems represented approximately
four percent of our total net sales in 2008. We are reliant on Abbott
Laboratories for our supply of PROMUS® stent systems. Any production or capacity
issues that affect Abbott’s manufacturing capabilities or the process for
forecasting, ordering and receiving shipments may impact our ability to increase
or decrease the level of supply to us in a timely manner; therefore, our supply
of PROMUS® stent systems may not align with customer demand, which could have an
adverse effect on our operating results. At present, we believe that our supply
of PROMUS® stent systems from Abbott is sufficient to meet our current customer
demand.
Further,
the price we pay Abbott for our supply of PROMUS® stent systems is determined by
our contracts with them. Our cost is based, in part, on previously
fixed estimates of Abbott’s manufacturing costs for PROMUS® stent systems and
third-party reports of our average selling price of PROMUS® stent systems.
Amounts paid pursuant to this pricing arrangement are subject to a retroactive
adjustment at pre-determined intervals based on Abbott’s actual costs to
manufacture these stent systems for us and our average selling price of PROMUS®
stent systems. During 2009, we may make a payment to or receive a payment from
Abbott based on the differences between their actual manufacturing costs and the
contractually stipulated manufacturing costs and differences between our actual
average selling price and third-party reports of our average selling price, in
each case, with respect to our purchases of PROMUS® stent systems from Abbott
during 2008, 2007 and 2006.
91
|
As
of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Property,
plant and equipment, net
|
||||||||
|
Land
|
$ | 116 | $ | 116 | ||||
|
Buildings
and improvements
|
865 | 801 | ||||||
|
Equipment,
furniture and fixtures
|
1,824 | 1,671 | ||||||
|
Capital
in progess
|
305 | 304 | ||||||
| 3,110 | 2,892 | |||||||
|
Less:
accumulated depreciation
|
1,382 | 1,177 | ||||||
| $ | 1,728 | $ | 1,715 | |||||
|
Accrued
expenses
|
||||||||
|
Legal
reserves
|
$ | 924 | $ | 499 | ||||
|
Acquisition-related
obligations
|
520 | 699 | ||||||
|
Payroll
and related liabilities
|
438 | 515 | ||||||
|
Restructuring
liabilities
|
42 | 137 | ||||||
|
Other
|
688 | 691 | ||||||
| $ | 2,612 | $ | 2,541 | |||||
|
Other
long-term liabilities
|
||||||||
|
Acquisition-related
obligations
|
$ | 465 | ||||||
|
Legal
reserves
|
$ | 165 | 495 | |||||
|
Accrued
income taxes
|
1,100 | 1,344 | ||||||
|
Other
long-term liabilities
|
462 | 329 | ||||||
| $ | 1,727 | $ | 2,633 | |||||
See Note E - Goodwill and Other
Intangible Assets for details on our intangible assets and Note F – Divestitures and Assets
Held for Sale for the components of those assets and associated
liabilities classified as held for sale in our consolidated balance
sheets.
Note
C – Fair Value Measurements
We
adopted FASB Statement No. 157, Fair Value Measurements, as
of January 1, 2008. Statement No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with U.S. GAAP, and expands
disclosures about fair value measurements. Statement No. 157 does not require
any new fair value measurements; rather, it applies to other accounting
pronouncements that require or permit fair value measurements. In February 2008,
the FASB released Staff Position No. 157-2, Effective Date of FASB Statement
No. 157, which delays the effective date of Statement No. 157
for all nonfinancial assets and nonfinancial liabilities, except for those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis. In accordance with Staff Position No. 157-2, we have not
applied the provisions of Statement No. 157 to the following nonfinancial assets
and nonfinancial liabilities:
|
•
|
Nonfinancial
assets and nonfinancial liabilities initially measured at fair value in a
business combination or other new basis event, but not measured at fair
value in subsequent reporting
periods;
|
|
•
|
Reporting
units and nonfinancial assets and nonfinancial liabilities measured at
fair value for our goodwill assessments in accordance with FASB Statement
No. 142, Goodwill and
Other Intangible Assets;
|
|
•
|
Indefinite-lived
intangible assets measured at fair value for impairment assessment in
accordance with Statement No. 142;
|
92
|
•
|
Nonfinancial
long-lived assets or asset groups measured at fair value for impairment
assessment or disposal under FASB Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets; and
|
|
•
|
Nonfinancial
liabilities associated with exit or disposal activities initially measured
at fair value under FASB Statement No. 146, Accounting for Costs
Associated with Exit or Disposal
Activities.
|
We will
be required to apply the provisions of Statement No. 157 to these nonfinancial
assets and nonfinancial liabilities as of January 1, 2009 and are currently
evaluating the impact of the application of Statement No. 157 as it
pertains to these items. The application of Statement No. 157 for financial
assets and financial liabilities did not have a material impact on our financial
position, results of operations or cash flows.
On a
recurring basis, we measure certain financial assets and financial liabilities
at fair value, including our money market funds, available-for-sale investments,
interest rate derivative instruments and foreign currency derivative contracts.
Statement No. 157 defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or liability. We base fair
value upon quoted market prices, where available. Where quoted market prices or
other observable inputs are not available, we apply valuation techniques to
estimate fair value.
Statement
No. 157 establishes a three-level valuation hierarchy for disclosure of fair
value measurements. The categorization of financial assets and financial
liabilities within the valuation hierarchy is based upon the lowest level of
input that is significant to the measurement of fair value. The three levels of
the hierarchy are defined as follows:
|
•
|
Level
1 – Inputs to the valuation methodology are quoted market prices for
identical assets or liabilities.
|
|
•
|
Level
2 – Inputs to the valuation methodology are other observable inputs,
including quoted market prices for similar assets or liabilities and
market-corroborated inputs.
|
|
•
|
Level
3 – Inputs to the valuation methodology are unobservable inputs based on
management’s best estimate of inputs market participants would use in
pricing the asset or liability at the measurement date, including
assumptions about risk.
|
Our
investments in money market funds, as well as available-for-sale
investments carried at fair value, are generally classified within Level 1
of the fair value hierarchy because they are valued using quoted market prices.
Our money market funds are classified as cash and cash equivalents within our
accompanying condensed consolidated balance sheets, in accordance with our
accounting policies, as these funds are highly liquid and readily convertible to
known amounts of cash.
During
2008, certain of our publicly traded available-for-sale investments were
classified within Level 3 of the fair value hierarchy as they were subject to
lock-up agreements. We used an option pricing model to determine the
liquidity discount associated with these lock-up restrictions as a part of our
fair value measurement within the framework of Statement No. 157. In
addition, certain of our publicly traded available-for-sale investments were
classified within Level 3, as they were marked to fair value based on agreements
to sell those investments to a third party. During 2008, we completed
the sale of these investments to the third party (see Note G – Investments and Notes
Receivable for further discussion); in addition, none of our
available-for-sale securities were subject to lock-up agreements as of December
31, 2008. Therefore, as of December 31, 2008, none of our investments
in available-for-sale securities were classified within Level 3. Our cost method
investments are adjusted to fair value only when impairment
93
charges
are recorded for other-than-temporary declines in value and are determined using
fair value criteria within the framework of Statement No. 157. As the
inputs utilized for the impairment assessment are not based on observable market
data, these cost method investments are classified within Level 3 of the fair
value hierarchy on a non-recurring basis.
We
recognize all derivative financial instruments in our consolidated financial
statements at fair value in accordance with FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. We determine the fair
value of these instruments using the framework prescribed by Statement No. 157,
by considering the estimated amount we would receive to sell or transfer these
agreements at the reporting date and by taking into account current interest
rates, current currency exchange rates, the creditworthiness of the counterparty
for assets, and our creditworthiness for liabilities. In certain
instances, we may utilize financial models to measure fair value. Generally, we
use inputs that include quoted prices for similar assets or liabilities in
active markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; other observable inputs for the asset or liability;
and inputs derived principally from, or corroborated by, observable market data
by correlation or other means. We have classified our derivative assets and
liabilities within Level 2 of the fair value hierarchy because these observable
inputs are available for substantially the full term of our derivative
instruments.
Fair Value Measured on a
Recurring Basis
Financial
assets and financial liabilities measured at fair value on a recurring basis
consist of the following as of December 31, 2008:
|
(in
millions)
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||||||||||
|
Assets
|
||||||||||||||||
|
Money
market funds
|
$ | 690 | $ | 690 | ||||||||||||
|
Available-for-sale
investments
|
1 | 1 | ||||||||||||||
|
Currency
exchange contracts
|
$ | 132 | 132 | |||||||||||||
|
Interest
rate swap contracts
|
||||||||||||||||
| $ | 691 | $ | 132 | $ | 823 | |||||||||||
|
Liabilities
|
||||||||||||||||
|
Currency
exchange contracts
|
$ | 195 | $ | 195 | ||||||||||||
|
Interest
rate swap contracts
|
46 | 46 | ||||||||||||||
| $ | 241 | $ | 241 | |||||||||||||
In
addition to $690 million invested in money market funds as of December 31, 2008,
we had $781 million of cash invested in short-term time deposits, and $170
million in interest bearing and non-interest bearing bank accounts.
For
assets measured at fair value using significant unobservable inputs (Level 3) as
of December 31, 2008, the following table summarizes the change in balances
during the year ended December 31, 2008 (in millions):
|
Balance
as of January 1, 2008
|
$ | 30 | ||
|
Net
transfers into Level 3
|
31 | |||
|
Net
sales
|
(44 | ) | ||
|
Realized
losses related to investment impairments
|
(1 | ) | ||
|
Change
in unrealized gains/losses related to market prices
|
(16 | ) | ||
|
Balance
as of December 31, 2008
|
$ | — |
94
Unrealized
gains/losses are included in other comprehensive income in our accompanying
condensed consolidated balance sheets.
Derivative
Instruments and Hedging Activities
We
develop, manufacture and sell medical devices globally and our earnings and cash
flows 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 into
derivative transactions for speculative purposes.
Currency
Hedging
We manage
our exposure to foreign currency denominated monetary assets and liabilities on
a consolidated basis to take advantage of offsetting transactions. We may use
foreign currency denominated borrowings and currency forward contracts to manage
the majority of the remaining transaction exposure. These currency forward
contracts are not designated as cash flow, fair value or net investment hedges
under Statement No. 133; are marked-to-market with changes in fair value
recorded to earnings; and are entered into for periods consistent with currency
transaction exposures, generally one to six months. These derivative instruments
do not subject our earnings or cash flows to material risk since gains and
losses on these derivatives generally offset losses and gains on the assets and
liabilities being hedged. In addition, changes in
currency exchange rates related to any unhedged transactions may impact our
earnings and cash flows.
We also
use currency forward and option contracts to reduce the risk that our earnings
and cash flows, associated with forecasted foreign currency denominated
intercompany and third-party transactions, will be affected by currency exchange
rate changes. These contracts are designated as foreign currency cash flow
hedges under Statement No. 133. We record the effective portion of
any change in the fair value of the foreign currency cash flow hedges in other
comprehensive income until the related third-party transaction occurs. Once the
related third-party transaction occurs, we reclassify the effective portion of
any related gain or loss on the foreign currency cash flow hedge from other
comprehensive income to earnings. In the event the hedged forecasted transaction
does not occur, or it becomes probable that it will not occur, we would
reclassify the effective portion of any gain or loss on the related cash flow
hedge from other comprehensive income to earnings at that time. Gains and losses
from hedge ineffectiveness were immaterial in 2008, 2007 and 2006. We recognized
in earnings net losses of $67 million in 2008, net gains of $20 million during
2007, and net gains of $38 million during 2006 on currency derivative
instruments. All cash flow hedges outstanding at December 31, 2008 mature
within 36 months. As of December 31, 2008, $6 million of net losses
are recorded in other comprehensive income, net of tax, to recognize the
effective portion of the fair value of any currency derivative instruments that
are, or previously were, designated as foreign currency cash flow hedges, as
compared to $58 million at December 31, 2007. At December 31, 2008, $1
million of net gains, net of tax, may be reclassified to earnings within the
next twelve months. The success of the hedging program depends, in part, on
forecasts of transaction activity in various currencies (primarily Japanese yen,
Euro, British pound sterling, Australian dollar and Canadian dollar). We may
experience unanticipated currency exchange gains or losses to the extent that
there are differences between forecasted and actual activity during periods of
currency volatility. Changes in currency exchange rates related to
any unhedged transactions may impact our earnings and cash flows.
Interest
Rate Hedging
We use
interest rate derivative instruments to manage our exposure to interest rate
movements and to reduce borrowing costs by converting floating-rate debt into
fixed-rate debt or fixed-rate debt into floating-rate debt. We designate these
derivative instruments either as fair value or cash flow hedges under Statement
No. 133. We record changes in the fair value of fair value
hedges in other income (expense), which is offset by changes in the fair value
of the hedged debt obligation to the extent the hedge is effective. Interest
expense includes interest payments made or received under interest rate
derivative instruments. We record the effective
95
portion
of any change in the fair value of cash flow hedges as other comprehensive
income, net of tax, until the hedged cash flow occurs, at which point the
effective portion of any gain or loss is reclassified to earnings.
Prior to
2006, we entered into fixed-to-floating interest rate swaps indexed to six-month
LIBOR to hedge against potential changes in the fair value of certain of our
senior notes. We designated these interest rate swaps as fair value hedges under
Statement No. 133 with changes in fair value recorded to earnings offset by
changes in the fair value of our hedged senior notes. We terminated these hedges
during 2006 and realized a net loss of $14 million, which we recorded to the
carrying amount of certain of our senior notes and which are being amortized
into earnings over the remaining term of the hedged debt. As of December 31,
2008, the carrying amount of certain of our senior notes included $3 million of
unamortized gains and $11 million of unamortized losses related to these
interest rate swaps, as compared to $4 million of unamortized gains and
$13 million of unamortized losses at December 31, 2007.
During
2005 and 2006, we entered floating-to-fixed treasury locks to hedge potential
changes in future cash flows of certain senior note issuances. The objective of
these hedges was to reduce potential variability of interest payments on the
forecasted senior notes issuance. We designated these treasury locks as cash
flow hedges under Statement No. 133. Upon termination of the treasury locks in
2006, we realized net gains of $21 million. At December 31, 2008, we had $8
million of unamortized gain, net of tax, recorded in accumulated other
comprehensive income, which we are amortizing into earnings over the term of the
hedged debt. At December 31, 2007, we had $10 million of unamortized
gain, net of tax, recorded in accumulated other comprehensive
income.
We had
floating-to-fixed interest rate swaps indexed to three-month LIBOR outstanding
in the notional amount of $4.9 billion at December 31, 2008 and $1.5 billion at
December 31, 2007. The objective of these derivative instruments is to hedge
against variability in our future interest payments on our LIBOR-indexed
floating-rate loans as a result of changes in LIBOR. Three-month LIBOR
approximated 1.425 percent at December 31, 2008 and 4.70 percent at December 31,
2007. We designated these interest rate swaps as cash flow hedges under
Statement No. 133, and record fluctuations in the fair value of these derivative
instruments as unrealized gains or losses in other comprehensive income, net of
tax, until the hedged cash flow occurs. At December 31, 2008, we recorded a net
unrealized loss of $28 million, net of tax, in other comprehensive income to
recognize the fair value of these interest rate derivative instruments, as
compared to $11 million of net unrealized losses at December 31,
2007.
We
recognized $20 million of net losses in earnings related to all current and
prior interest rate derivative contracts in 2008 as compared to net losses of $2
million in 2007, and net gains of $2 million in 2006. At December 31, 2008,
$26 million of net losses, net of tax, may be reclassified to earnings within
the next twelve months.
Fair Value Measured on a
Non-Recurring Basis
During
2008, we recorded impairment charges on certain of our cost method investments
and adjusted the carrying amount of those investments to fair value, as we
deemed the decline in the value of those assets to be
other-than-temporary. These impairment charges relate primarily to
our investments in, and notes receivable from, certain entities that we agreed
to sell during the second quarter of 2008. See Note G – Investments and Notes
Receivable for further discussion. These cost method investments fall
within Level 3 of the fair value hierarchy, due to the use of significant
unobservable inputs to determine fair value, as the investments are in privately
held entities without quoted market prices. To determine the fair
value of those investments, we used all available financial information related
to the entities, including information based on recent third-party equity
investments in these entities and information from our agreements to sell
certain of these investments. The following summarizes changes to the
carrying amount of these investments during the year ended December 31, 2008 (in
millions):
96
|
Balance
at January 1, 2008
|
$ | 24 | ||
|
Net
transfers into Level 3
|
156 | |||
|
Net
sales
|
(48 | ) | ||
|
Other-than-temporary
impairments
|
(112 | ) | ||
|
Balance
at December 31, 2008
|
$ | 20 |
Other Fair Value
Disclosures
The fair
value of our long-term debt obligations was $6.184 billion at December 31, 2008
and $7.603 billion at December 31, 2007. Refer to Note I – Borrowings and Credit
Arrangements for a discussion of our debt obligations.
Note
D—Acquisitions
During
2008, we paid approximately $40 million in cash to acquire CryoCor, Inc. and
Labcoat, Ltd. During 2007, we paid approximately $100 million through a
combination of cash and common stock to acquire EndoTex Interventional Systems,
Inc. and $70 million in cash to acquire Remon Medical Technologies,
Inc. During 2006, we paid $28.4 billion to acquire Guidant through a
combination of cash, common stock, and fully vested stock options.
Our
consolidated financial statements include the operating results for each
acquired entity from its respective date of acquisition. Pro forma information
for 2006 related to our acquisition of Guidant is included in the section that
follows. We do not present pro forma information for our other acquisitions
given the immateriality of their results to our consolidated financial
statements.
2008
Acquisitions
In
December 2008, we completed the acquisition of the assets of Labcoat, Ltd., for
a purchase price of $17 million, net of cash acquired. We may also be required
to make future payments contingent upon Labcoat achieving certain performance
milestones. Labcoat is developing a novel technology for coating drug-eluting
stents. We intend to use this technology in future generations of our
drug-eluting stent products.
In May
2008, we completed our acquisition of 100 percent of the fully diluted equity of
CryoCor, Inc., and paid a cash purchase price of $21 million, net of cash
acquired. CryoCor is developing products using cryogenic technology for use in
treating atrial fibrillation. The acquisition was intended to allow us to
further pursue therapeutic solutions for atrial fibrillation in order to advance
our existing CRM and Electrophysiology product lines.
2007
Acquisitions
In
January 2007, we completed our acquisition of 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. We issued
approximately five million shares of our common stock valued at $90 million and
paid approximately $10 million in cash, in addition to our previous investments
of approximately $40 million, to acquire the remaining interests of
EndoTex. In addition, we may be required to pay 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 August
2007, we completed our acquisition of 100 percent of the fully diluted equity of
Remon Medical Technologies, Inc. Remon is a development-stage company
focused on creating communication technology for medical device applications. We
paid approximately $70 million in cash, net of cash acquired, in addition to our
previous investments of $3 million, to acquire the remaining interests of Remon.
We may also be
97
required
to make future payments contingent upon Remon achieving certain performance
milestones. The acquisition was intended to expand our sensor and wireless
communication technology portfolio and complement our existing CRM product
line.
2006
Acquisitions
On April
21, 2006, we acquired 100 percent of the fully diluted equity of Guidant
Corporation for a purchase price of $21.7 billion, net of cash acquired, which
included: $7.8 billion in cash; 577 million shares of our common stock at an
estimated fair value of $12.5 billion; approximately 40 million of our fully
vested stock options granted to Guidant employees at an estimated fair value of
$450 million; $97 million associated with the buyout of options of certain
former vascular intervention and endovascular solutions Guidant employees; and
$770 million of direct acquisition costs, including a $705 million payment made
to Johnson & Johnson in connection with the termination of its merger
agreement with Guidant. Partially offsetting the purchase price was $6.7 billion
of cash that we acquired, including $4.1 billion in connection with Guidant’s
prior sale of its vascular intervention and endovascular solutions businesses to
Abbott Laboratories. The remaining cash relates to cash on hand at the time of
closing. There is no potential contingent consideration payable to the
former Guidant shareholders.
Upon the
closing of the acquisition, each share of Guidant common stock (other than
shares owned by Guidant and Boston Scientific) was converted into (i) $42.00 in
cash, (ii) 1.6799 shares of Boston Scientific common stock, and (iii) $0.0132 in
cash per share for each day beginning on April 1 through the closing date of
April 21, representing an additional $0.28 per share. The number of Boston
Scientific shares issued for each Guidant share was based on an exchange ratio
determined by dividing $38.00 by the average closing price of Boston Scientific
common stock during the 20 consecutive trading day period ending three days
prior to the closing date, so long as the average closing price during that
period was between $22.62 and $28.86. If the average closing price during that
period was below $22.62, the merger agreement specified a fixed exchange ratio
of 1.6799 shares of Boston Scientific common stock for each share of Guidant
common stock. Because the average closing price of Boston Scientific common
stock during that period was less than $22.62, Guidant shareholders received
1.6799 Boston Scientific shares for each share of Guidant common
stock.
We
measured the fair value of the 577 million shares of our common stock issued as
consideration in conjunction with our acquisition of Guidant under Statement No.
141, and EITF Issue No. 99-12, Determination of the Measurement
Date for the Market Price of Acquirer Securities Issued in a Purchase Business
Combination. We determined the measurement date to be April 17, 2006, the
first date on which the average 20-day closing price fell below $22.62 and the
number of Boston Scientific shares to be issued according to the exchange ratio
became fixed without subsequent revision. We valued the securities based on
average market prices a few days before and after the measurement date
(beginning on April 12 and ending on April 19), which did not include any dates
after the April 21 closing date of the acquisition. The weighted-average stock
price so determined was $21.68.
To
finance the cash portion of the Guidant acquisition, we borrowed $6.6 billion
consisting of a $5.0 billion five-year term loan and a $700 million 364-day
interim credit facility loan from a syndicate of commercial and investment
banks, as well as a $900 million subordinated loan from Abbott. See Note I - Borrowings and Credit
Arrangements for further details regarding the debt issued to finance the
cash portion of the Guidant acquisition.
We made
our offer to acquire Guidant after the execution of a merger agreement between
Guidant and Johnson & Johnson. On January 25, 2006, Guidant
terminated the Johnson & Johnson merger agreement and, in connection
with the termination, Guidant paid Johnson & Johnson a termination fee
of $705 million. We then reimbursed Guidant for the full amount of the
termination fee paid to Johnson & Johnson.
98
Abbott
Transaction
On April
21, 2006, before the closing of the Boston Scientific-Guidant transaction,
Abbott acquired Guidant’s vascular intervention and endovascular solutions
businesses for:
|
•
|
an
initial payment of $4.1 billion in cash at the Abbott transaction
closing;
|
|
•
|
a
milestone payment of $250 million upon receipt of an approval from
the U.S. Food and Drug Administration (FDA) within ten years after the
Abbott transaction closing to market and sell an everolimus-eluting stent
in the U.S.; and
|
|
•
|
a
milestone payment of $250 million upon receipt of an approval from the
Japanese Ministry of Health, Labor and Welfare within ten years after
the Abbott transaction closing to market and sell an everolimus-eluting
stent in Japan.
|
Further,
Abbott purchased from us approximately 65 million shares of our common stock for
$1.4 billion, or $21.66 per share. Abbott agreed not to sell any of these
shares of common stock for six months following the transaction closing
unless the average price per share of our common stock over any consecutive
20-day trading period during that six-month period exceeded $30.00. In addition,
during the 18-month period following the transaction closing, Abbott was
precluded from, in any one-month period, selling more than 8.33 percent of these
shares of our common stock. Abbott was required to sell all of these shares of
our common stock no later than 30 months following the April 21, 2006
acquisition date, and apply a portion of the net proceeds from its sale of these
shares of our common stock in excess of specified amounts, if any, to reduce the
principal amount of the loan from Abbott to us (sharing of proceeds feature). As
of the first quarter of 2008, Abbott had sold all of its shares of our common
stock, and no amounts were applied as a reduction of the loan.
We
determined the fair value of the sharing of proceeds feature of the Abbott stock
purchase as of April 21, 2006 to be $103 million and recorded this amount as an
asset received in connection with the sale of the Guidant vascular intervention
and endovascular solutions business to Abbott. We revalued this instrument each
reporting period, and recorded net expense of approximately $8 million during
2007 and $95 million during 2006 to reflect a decrease in fair value. There
was no income or expense associated with this instrument in 2008 prior to Abbott
selling all of its shares of our common stock.
We used a
Monte Carlo simulation methodology in determining the value of the sharing of
proceeds feature. We estimated the fair value on April 21, 2006 using the
following assumptions.
|
BSX
stock price
|
$ | 22.49 | ||
|
Expected
volatility
|
30% | |||
|
Risk-free
interest rate
|
4.9% | |||
|
Credit
spread
|
0.35% | |||
|
Expected
dividend yield
|
0% | |||
|
Contractual
term to expiration (years)
|
2.5 | |||
|
Notional
shares
|
64,635,272 |
In
connection with the Abbott transaction, we agreed to issue Abbott additional
shares of our common stock having an aggregate value of up to $60 million
eighteen months following the transaction closing to reimburse Abbott for a
portion of its cost of borrowing $1.4 billion to purchase the shares of our
common stock. We recorded the $60 million obligation as a liability assumed in
connection with the sale of Guidant’s vascular intervention and endovascular
solutions businesses to Abbott. In October 2007, we modified our agreement with
Abbott, and paid this obligation in cash, rather than in shares of our common
stock.
Prior to
the Abbott transaction closing, Boston Scientific and Abbott entered transition
services agreements under which (i) we were to provide or make available to the
Guidant vascular and endovascular solutions businesses acquired by Abbott those
services, rights, properties and assets of Guidant that were not included in the
assets purchased by Abbott and that are reasonably required by Abbott to enable
them to conduct the Guidant vascular and endovascular solutions businesses
substantially as conducted at the time of the Abbott transaction closing; and
(ii) Abbott was to provide or make available to us those services, rights,
properties and assets reasonably required by Boston Scientific to enable it to
conduct the business conducted by
99
Guidant,
other than the Guidant vascular and endovascular solutions businesses, in
substantially the same manner as conducted as of the Abbott transaction closing,
to the extent those services, rights, properties and assets were included in the
assets purchased by Abbott. As of December 31, 2008, all but one of these
transition services agreements had expired; the remaining agreement will expire
at the end of 2009.
Purchase
Price
We
accounted for the acquisition of Guidant as a purchase under U.S. GAAP. Under
the purchase method of accounting, we recorded the assets and liabilities of
Guidant as of the acquisition date at their respective fair values, and
consolidated them with those of legacy Boston Scientific. The preparation
of the valuation required the use of significant assumptions and estimates.
Critical estimates included, but were not limited to, future expected cash flows
and the applicable discount rates as of the date of the
acquisition.
The
purchase price, net of cash acquired, is as follows (in millions):
|
Consideration to
Guidant
|
||||
|
Cash
portion of consideration
|
$ | 14,527 | ||
|
Fair
value of Boston Scientific common stock
|
12,514 | |||
|
Fair
value of Boston Scientific options exchanged for Guidant stock
options
|
450 | |||
|
Buyout
of options for certain former employees
|
97 | |||
| 27,588 | ||||
|
Other
acquisition-related costs
|
||||
|
Johnson
& Johnson termination fee
|
705 | |||
|
Other
direct acquisition costs
|
65 | |||
|
Total
purchase price
|
28,358 | |||
|
Less:
cash acquired
|
6,708 | |||
|
Purchase
price, net of cash acquired
|
$ | 21,650 | ||
The fair
value of the Boston Scientific stock options exchanged for Guidant options was
included in the purchase price due to the fact that the options were fully
vested. We estimated the fair value of these options using a Black-Scholes
option-pricing model. We estimated the fair value of the stock options assuming
no expected dividends and the following weighted-average
assumptions:
|
Expected
term (in years)
|
2.4
|
|
Expected
volatility
|
30%
|
|
Risk-free
interest rate
|
4.9%
|
|
Stock
price on date of grant
|
$22.49
|
|
Weighted-average
exercise price
|
$13.11
|
100
Purchase
Price Allocation
The
following summarizes the Guidant purchase price allocation (in
millions):
|
Cash
|
$ | 6,708 | ||
|
Intangible
assets subject to amortization
|
7,719 | |||
|
Goodwill
|
12,516 | |||
|
Other
assets
|
2,400 | |||
|
Purchased
research and development
|
4,169 | |||
|
Current
liabilities
|
(1,881 | ) | ||
|
Net
deferred income taxes
|
(2,497 | ) | ||
|
Exit
costs
|
(161 | ) | ||
|
Other
long-term liabilities
|
(701 | ) | ||
|
Deferred
cost, ESOP
|
86 | |||
|
Total
purchase price
|
28,358 | |||
|
Less:
cash acquired
|
6,708 | |||
|
Purchase
price, net of cash acquired
|
$ | 21,650 |
We
allocated the purchase price to specific intangible asset categories as
follows:
|
Amount
Assigned
(in
millions)
|
Weighted
Average Amortization Period
(in
years)
|
Risk-Adjusted
Discount Rates used in Purchase Price Allocation
|
||||||||||
|
Amortizable
intangible assets
|
||||||||||||
|
Technology
- core
|
$ | 6,142 | 25 |
10%-16%
|
||||||||
|
Technology
- developed
|
885 | 6 |
10%
|
|
||||||||
|
Customer
relationships
|
688 | 15 |
10%-13%
|
|||||||||
|
Other
|
4 | 10 |
10%
|
|||||||||
| $ | 7,719 | 22 | ||||||||||
|
Purchased
research and development
|
$ | 4,169 |
13%-17%
|
|||||||||
|
Goodwill
|
$ | 12,516 | ||||||||||
We
believe that the estimated intangible assets and purchased research and
development so determined represent the fair value at the date of acquisition
and do not exceed the amount a third party would pay for the assets. We used the
income approach to determine the fair value of the amortizable intangible assets
and purchased research and development. We valued and accounted for the
identified intangible assets and purchased research and development in
accordance with our policy as described in Note A - Significant Accounting
Policies.
The core
technology consists of technical processes, intellectual property, and
institutional understanding with respect to products or processes that were
developed by Guidant and that we will leverage in future products or processes.
Core technology represents know-how, patented and unpatented technology, testing
methodologies and hardware that will be carried forward from one product
generation to the next. Over 90 percent of the value assigned to core technology
is associated with Guidant’s CRM products and includes battery and capacitor
technology, lead technology, software algorithms, and interfacing for shocking
and pacing.
The
developed technology acquired from Guidant represents the value associated with
marketed products that had received FDA approval as of the acquisition date.
Guidant’s marketed products as of the acquisition date included:
101
|
•
|
Implantable
cardioverter defibrillator (ICD) systems used to detect and treat
abnormally fast heart rhythms (tachycardia) that could result in sudden
cardiac death, including implantable cardiac resynchronization therapy
defibrillator (CRT-D) systems used to treat heart
failure;
|
|
•
|
Implantable
pacemaker systems used to manage slow or irregular heart rhythms
(bradycardia), including implantable cardiac resynchronization therapy
pacemaker (CRT-P) systems used to treat heart failure;
and
|
|
•
|
Cardiac
surgery systems used to perform cardiac surgical ablation, endoscopic vein
harvesting and clampless beating-heart bypass
surgery.
|
We sold
the Cardiac Surgery business we acquired with Guidant in a separate transaction
in 2008. Refer to Note F– Divestitures and Assets Held for
Sale for further information.
Customer
relationships represent the estimated fair value of the non-contractual customer
relationships Guidant had with physician customers as of the acquisition date.
The primary physician users of Guidant’s largest selling products include
electrophysiologists, implanting cardiologists, cardiovascular surgeons, and
cardiac surgeons. These relationships were valued separately from goodwill as
Guidant (i) had information about and had regular contact with its physician
customers and (ii) the physician customers had the ability to make direct
contact with Guidant. We used the income approach to estimate the fair value of
customer relationships as of the acquisition date.
Various
factors contributed to the establishment of goodwill, including: the strategic
benefit of entering the CRM market and diversifying our product portfolio; the
value of Guidant’s highly trained assembled workforce as of the acquisition
date; the expected revenue growth over time that is attributable to expanded
indications and increased market penetration from future products and customers;
the incremental value to our existing Interventional Cardiology business from
having two drug-eluting stent platforms; and the synergies expected to result
from combining infrastructures, reducing combined operational spend and program
reprioritization. During 2008, we recorded a $2.613 billion goodwill impairment
charge associated with our acquisition of Guidant. Refer to Note E – Goodwill and Other Intangible Assets
for more information.
Pro
Forma Results of Operations
The
following unaudited pro forma information presents a summary of consolidated
results of our operations and Guidant’s, as if the acquisition, the Abbott
transaction and the financing for the acquisition had occurred at the beginning
of 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 unaudited pro
forma 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 intervention and endovascular
solutions businesses to Abbott and the financing transactions with Abbott and
other lenders been completed at the beginning of the period. Pro forma
adjustments are tax-effected at our effective tax rate.
|
Year
Ended
|
|||||
|
in
millions, except per share data
|
December
31, 2006
|
||||
|
(unaudited)
|
|||||
|
Net
sales
|
$ | 8,533 | |||
|
Net
loss
|
(3,916 | ) | |||
|
Net
loss per share - basic
|
$ | (2.66 | ) | ||
|
Net
loss per share - assuming dilution
|
$ | (2.66 | ) | ||
102
The
unaudited pro forma net loss includes $480 million for the amortization of
purchased intangible assets, as well as the following non-recurring charges:
purchased research and development of $4.169 billion; $267 million associated
with the step-up value of acquired inventory sold; a tax charge for the
drug-eluting stent license right obtained from Abbott; and $95 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.
Included
in the final Guidant purchase price allocation is $161 million associated with
exit activities accrued pursuant to Issue No. 95-3. 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 made severance,
relocation and change-in-control payments. The majority of the exit costs relate
to our first quarter 2007 reduction of the acquired CRM workforce. 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 2007 and 2008, we reduced our estimate for
Guidant-related exit costs in accordance with Issue No. 95-3. A rollforward of
the components of our accrual for Guidant-related and other exit costs is as
follows:
|
Workforce
Reductions
|
Relocation
Costs
|
Contractual
Commitments
|
Total
|
|||||||||||||
|
Balance
as of January 1, 2006
|
||||||||||||||||
|
Purchase
price adjustments
|
$ | 190 | $ | 15 | $ | 30 | $ | 235 | ||||||||
|
Charges
utilized
|
(27 | ) | (5 | ) | (5 | ) | (37 | ) | ||||||||
|
Balance
as of December 31, 2006
|
163 | 10 | 25 | 198 | ||||||||||||
|
Purchase
price adjustments
|
(63 | ) | (2 | ) | (7 | ) | (72 | ) | ||||||||
|
Charges
utilized
|
(85 | ) | (6 | ) | (9 | ) | (100 | ) | ||||||||
|
Balance
as of December 31, 2007
|
15 | 2 | 9 | 26 | ||||||||||||
|
Purchase
price adjustments
|
(1 | ) | (1 | ) | (2 | ) | ||||||||||
|
Charges
utilized
|
(4 | ) | (1 | ) | (3 | ) | (8 | ) | ||||||||
|
Balance
as of December 31, 2008
|
$ | 10 | $ | — | $ | 6 | $ | 16 | ||||||||
Payments
Related to Prior Period Acquisitions
During
2008, we paid $675 million related to prior period acquisitions, consisting
primarily of a $650 million fixed payment made to the principal former
shareholders of Advanced Bionics Corporation in connection with our 2007
amendment to the original merger agreement, which was accrued at December 31,
2007. During 2007, we paid $248 million for acquisition-related payments
associated primarily with Advanced Bionics, of which approximately $220 million
was accrued at December 31, 2006. During 2006, we paid $397 million for
acquisition-related payments associated primarily with Advanced Bionics,
CryoVascular Systems, Inc. and Smart Therapeutics, Inc.
Certain
of our acquisitions involve the payment of contingent consideration. Payment of
the additional consideration is generally contingent on the acquired company
reaching certain performance milestones, including attaining specified revenue
levels, achieving product development targets or obtaining regulatory approvals.
In August 2007, we entered an agreement to amend our 2004 merger agreement with
the principal former shareholders of Advanced Bionics Corporation. Previously,
we were obligated to pay future consideration contingent primarily on the
achievement of future performance milestones. The amended agreement provides a
new schedule of consolidated, fixed payments, consisting of $650 million that
was paid in January 2008, and $500 million payable in March 2009. The fair value
of these payments, determined to be $1.115 billion, was accrued at December 31,
2007. As of December 31, 2008, we have accrued $497 million
103
representing
the fair value of the payment to be made in March 2009. These payments will be
the final payments made to Advanced Bionics. See Note F – Divestitures and Assets
Held for Sale for further discussion of the amendment. As of December 31,
2008, the estimated maximum potential amount of future contingent consideration
(undiscounted) that we could be required to make associated with our other
business combinations, excluding Advanced Bionics, some of which may be payable
in common stock, is approximately $650 million. The milestones associated with
the contingent consideration must be reached in certain future periods ranging
from 2009 through 2022. The estimated cumulative specified revenue level
associated with these maximum future contingent payments is approximately $2.4
billion.
Purchased Research and
Development
In 2008,
we recorded $43 million of purchased research and development charges, including
$17 million associated with our acquisition of Labcoat, Ltd., $8 million
attributable to our acquisition of CryoCor, Inc., and $18 million associated
with entering certain licensing and development arrangements.
The $17
million of in-process research and development associated with our acquisition
of Labcoat, Ltd. relates to their in-process coating technology for drug-eluting
stents. The $8 million of purchased research and development associated with
CryoCor relates to their cryogenic technology for use in the treatment of atrial
fibrillation.
In 2007,
we recorded $85 million of purchased research and development, including $75
million associated with our acquisition of Remon Medical Technologies, Inc., $13
million resulting from the application of equity method accounting for one of
our strategic investments, and $12 million associated with payments made for
certain early-stage CRM technologies. Additionally, in June 2007, we terminated
our product development agreement with Aspect Medical Systems relating to brain
monitoring technology that Aspect has been developing to aid the diagnosis and
treatment of depression, Alzheimer’s disease and other neurological conditions.
As a result, we recognized a credit to purchased research and development of
approximately $15 million during 2007, representing future payments that we
would have been obligated to make prior to the termination of the agreement. We
do not expect the termination of the agreement to impact our future operations
or cash flows materially.
The $75
million of in-process research and development acquired with Remon relates to
their pressure-sensing system development project, which we intend to combine
with our existing CRM devices. As of December 31, 2008, we estimate that the
total cost to complete the development project is between $75 million and $80
million. We expect to launch devices using pressure-sensing technology in 2012
in our EMEA region and certain Inter-Continental countries, in the U.S. in
2015, and Japan in 2016, subject to regulatory approvals. We expect material net
cash inflows from such products to commence in 2015, following the launch of
this technology in the U.S.
In 2006,
we recorded $4.119 billion of purchased research and development, including a
charge of approximately $4.169 billion associated with the in-process research
and development obtained in conjunction with the Guidant acquisition; a credit
of $67 million resulting primarily from the reversal of accrued contingent
payments due to the cancellation of the TriVascular AAA program; and an expense
of $17 million resulting primarily from the application of equity method
accounting for one of our investments.
The
$4.169 billion of purchased research and development associated with the Guidant
acquisition consists primarily of approximately $3.26 billion for acquired
CRM-related technology and $540 million for drug-eluting stent technology shared
with Abbott. The purchased research and development value associated with the
Guidant acquisition also includes $369 million representing the estimated fair
value of the potential milestone payments of up to $500 million that we may
receive from Abbott upon its receipt of regulatory approvals for certain
products. We recorded the amounts as purchased research and development at the
acquisition date because the receipt of the payments was dependent on future
research and development activity and regulatory approvals, and the asset had no
alternative future use as of the acquisition date. In 2008, Abbott received FDA
approval and launched its XIENCE V™ everolimus-eluting coronary stent system in
the U.S.,
104
and paid
us $250 million, which we recognized as a gain in our consolidated financial
statements. Under the terms of the agreement, we are entitled to receive a
second milestone payment of $250 million from Abbott upon receipt of an approval
from the Japanese Ministry of Health, Labour and Welfare to market the
XIENCE V™ stent system in Japan. If received, we will record this receipt as a
gain in our consolidated financial statements at the time of
receipt.
The most
significant in-process purchased research and development projects acquired from
Guidant included the next-generation CRM pulse generator platform and rights to
the everolimus-eluting stent technology that we share with Abbott. The
next-generation pulse generator platform incorporates new components and
software while leveraging certain existing intellectual property, technology,
manufacturing know-how and institutional knowledge of Guidant. We expect to
leverage this platform across all CRM product families, including ICD systems,
cardiac resynchronization therapy (CRT) devices and pacemaker systems, to treat
electrical dysfunction in the heart. During 2008, we substantially completed the
in-process CRM pulse generator project with the regulatory approval and launch
of the COGNIS® CRT-D and TELIGEN® ICD devices in the U.S., our EMEA region and
certain Inter-Continental countries. We expect to launch the INGENIO™ pacemaker
system, utilizing this platform in both EMEA and the U.S. in the first half of
2011. As of December 31, 2008, we estimate that the total cost to complete the
INGENIO™ technology is between $30 million and $35 million and expect material
net cash inflows from the INGENIO™ device to commence in the second half of
2011.
The $540
million attributable to everolimus-eluting stent technology represents the
estimated fair value of the rights to Guidant’s everolimus-based drug-eluting
stent technology we share with Abbott. In December 2006, we launched the PROMUS®
everolimus-eluting coronary stent system, supplied to us by Abbott, in certain
European countries. In 2007, we expanded our launch in Europe, as well as in key
countries in other regions and, in July 2008, launched in the U.S. We expect to
launch an internally developed and manufactured next-generation everolimus-based
stent in late 2009 and in the U.S. and Japan in mid-2012. We expect
that net cash inflows from our internally developed and manufactured
everolimus-based drug-eluting stent, the PROMUS® Element™, will commence in
2010. As of December 31, 2008, we estimate that the cost to complete our
internally manufactured next-generation everolimus-eluting stent technology
project is between $150 million and $175 million.
Note E—Goodwill
and Other Intangible Assets
The gross
carrying amount of goodwill and other intangible assets and the related
accumulated amortization for intangible assets subject to amortization is as
follows:
105
|
As
of December 31, 2008
|
As
of December 31, 2007
|
|||||||||||||||
|
(in
millions)
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
||||||||||||
|
Amortizable
intangible assets
|
||||||||||||||||
|
Technology
- core
|
$ | 6,564 | $ | 854 | $ | 6,596 | $ | 526 | ||||||||
|
Technology
- developed
|
1,026 | 664 | 1,096 | 515 | ||||||||||||
|
Patents
|
564 | 264 | 579 | 257 | ||||||||||||
|
Other
intangible assets
|
791 | 210 | 806 | 142 | ||||||||||||
| $ | 8,945 | $ | 1,992 | $ | 9,077 | $ | 1,440 | |||||||||
|
Unamortizable
intangible assets
|
||||||||||||||||
|
Goodwill
|
$ | 12,421 | $ | 15,103 | ||||||||||||
|
Technology
- core
|
291 | 327 | ||||||||||||||
| $ | 12,712 | $ | 15,430 | |||||||||||||
During
the fourth quarter of 2008, we performed an interim goodwill impairment test on
our U.S. CRM reporting unit, acquired with Guidant, and recorded a $2.613
billion goodwill impairment charge. The interim test was performed because the
decline in our stock price and corresponding market capitalization during the
fourth quarter created an indication of potential impairment of our goodwill
balance. As the majority of the goodwill associated with our acquisition of
Guidant is allocated to the U.S. CRM reporting unit, this unit is most impacted
by subsequent changes in fair value. The key factors that contributed to the
U.S. CRM goodwill impairment charge included disruptions in the credit and
equity markets, and the resulting increase to weighted-average costs of capital;
and reductions in CRM market demand relative to our assumptions at the time of
the Guidant acquisition. At the time of the Guidant acquisition in 2006, we
expected average U.S. net sales growth rates in the mid-teens. Due to changes in
end market demand, we now expect average U.S. net sales growth rates in the mid
to high single digits.
We used
the income approach to determine the fair value of the U.S. CRM reporting unit
acquired as part of the Guidant transaction and the amount of the goodwill
impairment charge. This approach calculates fair value by estimating the
after-tax cash flows attributable to a reporting unit and then discounting these
after-tax cash flows to a present value using a risk-adjusted discount
rate. This methodology is consistent with how we estimate the fair
value of our reporting units during our annual goodwill impairment tests. In
applying the income approach to calculate the fair value of the U.S. CRM
reporting unit, we used reasonable estimates and assumptions about future
revenue contributions and cost structures. In addition, the application of the
income approach requires judgment in determining a risk-adjusted discount rate;
at the reporting unit level, we based this determination on estimates of
weighted-average costs of capital of a market participant. We performed a peer
company analysis and considered the industry weighted-average return on debt and
equity from a market participant perspective. Given the disruptions in the
credit and equity markets, this weighted-average return increased 150 basis
points between our annual test performed in the second quarter of 2008, and the
interim test performed during the fourth quarter. The long-term growth rates for
our U.S. CRM reporting unit underlying our interim test at December 31, 2008 are
largely consistent with those applied in the annual test during the second
quarter of 2008.
To
calculate the amount of the goodwill impairment charge, we allocated the fair
value of the U.S. CRM reporting unit to all of its assets and liabilities,
including certain unrecognized intangible assets, in order to determine the
implied fair value of goodwill at December 31, 2008. This allocation process
required judgment and the use of additional valuation assumptions in deriving
the individual fair values of our U.S. CRM reporting unit’s assets and
liabilities as if the U.S. CRM reporting unit had been acquired in a business
combination. We believe our determined fair values and the resulting goodwill
impairment charge are based on reasonable assumptions and represent the best
estimate of these amounts at December 31, 2008. The goodwill impairment charge
has been excluded from the determination of segment income considered by
management.
106
In
addition, during 2008, we reduced our future revenue and cash flow forecasts
associated with certain of our Peripheral Interventions-related intangible
assets, primarily as a result of a recall of one of our
products. Therefore, we tested these intangible assets for
impairment, in accordance with our accounting policies, and determined that
these assets were impaired, resulting in a $131 million charge to write down
these intangible assets to their fair value. Further, as a result of
significantly lower than forecasted sales of certain of our Urology products,
due to lower than anticipated market penetration, we determined that certain of
our Urology-related intangible assets were impaired, resulting in a $46 million
charge to write down these intangible assets to their fair value. These amounts
have been excluded from the determination of segment income considered by
management.
The
intangible asset category and associated write down is as follows (in
millions):
|
Technology
- core
|
$ | 126 | ||
|
Other
intangible assets
|
51 | |||
| $ | 177 |
In 2007,
we recorded intangible asset impairment charges of $21 million associated with
our acquisition of Advanced Stent Technologies (AST), due to our decision to
suspend further significant funding of R&D with respect to the Petal™
bifurcation stent. In 2006, we
recorded intangible asset impairment charges of $23 million attributable to the
cancellation of the AAA stent-graft program we acquired with TriVascular, Inc.
In addition, we recorded intangible asset write-offs of $21 million associated
with developed technology obtained as part of our 2005 acquisition of Rubicon
Medical Corporation, and $12 million associated with our Real-time Position
Management® System (RPM)™ technology, due to our decision to cease investment in
these technologies.
Our core
technology that is not subject to amortization represents technical processes,
intellectual property and/or institutional understanding acquired through
business combinations that is fundamental to the on-going operations of our
business and has no limit to its useful life. Our core technology that is not
subject to amortization is comprised primarily of certain purchased stent and
balloon technology, which is foundational to our continuing operations within
the Cardiovascular market and other markets within interventional medicine. We
amortize all other core technology over its estimated useful life.
Estimated
amortization expense for each of the five succeeding fiscal years based upon our
intangible asset portfolio at December 31, 2008 is as follows:
|
Fiscal
Year
|
Estimated
Amortization
Expense
(in
millions)
|
||||
|
2009
|
$ | 491 | |||
|
2010
|
478 | ||||
|
2011
|
387 | ||||
|
2012
|
343 | ||||
|
2013
|
334 | ||||
Goodwill
as of December 31 as allocated to our U.S., EMEA and Inter-Continental
segments for purposes of our goodwill impairment testing is presented below. Our
U.S. goodwill is further allocated to our U.S. reporting units for our goodwill
testing in accordance with Statement No. 142. During 2008, we reorganized our
international business, and therefore, revised our reportable segments to
reflect the way we currently manage and view our business. Refer to Note P – Segment Reporting
for more information on our reporting structure and segment results. We
have reclassified previously reported 2007 and 2006 goodwill balances and
activity by segment to be consistent with the 2008 presentation.
107
|
(in
millions)
|
United
States
|
EMEA
|
Inter-
Continental
|
Total
|
||||||||||||
|
Balance
as of January 1, 2007
|
$ | 9,529 | $ | 3,955 | $ | 1,144 | $ | 14,628 | ||||||||
|
Purchase
price adjustments
|
77 | 54 | 11 | 142 | ||||||||||||
|
Goodwill
acquired
|
34 | 10 | 8 | 52 | ||||||||||||
|
Contingent
consideration
|
924 | 139 | 83 | 1,146 | ||||||||||||
|
Goodwill
reclassified to assets held for sale
|
(311 | ) | (1 | ) | (1 | ) | (313 | ) | ||||||||
|
Goodwill
written off
|
(478 | ) | (46 | ) | (28 | ) | (552 | ) | ||||||||
|
Balance
as of December 31, 2007
|
$ | 9,775 | $ | 4,111 | $ | 1,217 | $ | 15,103 | ||||||||
|
Purchase
price adjustments
|
(7 | ) | (38 | ) | (29 | ) | (74 | ) | ||||||||
|
Contingent
consideration
|
5 | 5 | ||||||||||||||
|
Goodwill
written off
|
(2,613 | ) | (2,613 | ) | ||||||||||||
|
Balance
as of December 31, 2008
|
$ | 7,160 | $ | 4,073 | $ | 1,188 | $ | 12,421 | ||||||||
During
2007, we determined that certain of our businesses were no longer strategic to
our on-going operations. Therefore, in conjunction with the anticipated sales of
our Auditory, Cardiac Surgery and Vascular Surgery businesses, we recorded $552
million of goodwill write-downs in 2007 in accordance with FASB Statement No.
142, Goodwill and Other
Intangible Assets, and FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets. In addition, in accordance with
Statement No. 144, we present separately the assets of the disposal groups,
including the related goodwill, as ‘assets held for sale’ within our
consolidated balance sheets. Refer to Note F – Divestitures and Assets
Held for Sale for more information regarding these transactions, and for
the major classes of assets, including goodwill, classified as held for
sale.
The 2007
and 2008 purchase price adjustments related primarily to adjustments in taxes
payable and deferred income taxes, including changes in the liability for
unrecognized tax benefits in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes; as well as reductions in our estimate for Guidant-related exit
costs. In addition, the 2007 purchase price adjustments included
changes in our estimates for the costs associated with Guidant product liability
claims and litigation.
Note F—Divestitures
and Assets Held for Sale
During
2007, we determined that our Auditory, Cardiac Surgery, Vascular Surgery, Venous
Access, and Fluid Management businesses, as well as our TriVascular
Endovascular Aortic Repair (EVAR) program, were no longer strategic to our
on-going operations. Therefore, we initiated the process of selling these
businesses in 2007, and completed their sale in the first quarter of 2008, as
discussed below. We received gross proceeds of approximately $1.3 billion from
these divestitures. The sale of these disposal groups has helped allow us to
focus on our core businesses and priorities. Management committed to a plan to
sell each of these businesses in 2007 and, pursuant to Statement No. 144, we
adjusted the carrying value of the disposal groups to their fair value, less
cost to sell (if lower than the carrying value) during 2007, and presented
separately the assets of the disposal groups as ‘assets held for sale’ and the
liabilities of the disposal groups as ‘liabilities associated with assets held
for sale’ in our consolidated balance sheets.
In
addition, in 2008 we committed to the sale of certain of our owned properties
and, in accordance with Statement No. 144, have presented separately the
carrying value, less cost to sell, of the properties as ‘assets held for sale’
in our consolidated balance sheets.
Auditory
In August
2007, we entered an agreement to amend our 2004 merger agreement with the
principal former shareholders of Advanced Bionics Corporation. The
acquisition of Advanced Bionics included potential earnout payments that were
contingent primarily on the achievement of future performance milestones, with
certain milestones tied to profitability. The amended agreement provides for a
new schedule of consolidated,
108
fixed
payments to the former Advanced Bionics shareholders, consisting of $650 million
that was paid upon closing in January 2008, and $500 million payable in March
2009. These payments will be the final payments made to Advanced Bionics. The
former shareholders of Advanced Bionics approved the amended merger agreement in
September 2007. Following the approval by the former shareholders, we accrued
the fair value of these payments in accordance with Statement No. 141, as the
payment of this consideration was determinable beyond a reasonable doubt. The
fair value of these payments, determined to be $1.115 billion, was recorded as
an increase to goodwill. At December 31, 2008, we have accrued $497 million,
representing the present value of the final payment to be made in March
2009.
In
conjunction with the amended merger agreement, in January 2008, we completed the
sale of a controlling interest in our Auditory business and drug pump
development program, acquired with Advanced Bionics in 2004, to entities
affiliated with the principal former shareholders of Advanced Bionics for an
aggregate purchase price of $150 million in cash. To adjust the carrying
value of the disposal group to its fair value, less costs to sell, we recorded a
loss of approximately $367 million (pre-tax) in 2007, representing primarily a
write-down of goodwill. In addition, we recorded a tax benefit of $7 million
during 2008 in connection with the closing of the transaction. Under the terms
of the agreement, we retained an equity interest in the limited liability
companies formed for purposes of operating the Auditory business and drug pump
development program. In accordance with EITF Issue No. 03-16, Accounting for Investments in
Limited Liability Companies, we are accounting for these investments
under the equity method of accounting.
Cardiac
Surgery and Vascular Surgery
In
January 2008, we completed the sale of our Cardiac Surgery and Vascular Surgery
businesses to the Getinge Group for net cash proceeds of approximately $700
million. To adjust the carrying value of the Cardiac Surgery and Vascular
Surgery disposal group to its fair value, less costs to sell, we recorded a loss
of approximately $193 million in 2007, representing primarily the write-down of
goodwill. In addition, we recorded a tax expense of $19 million during 2008 in
connection with the closing of the transaction. We acquired the
Cardiac Surgery business in April 2006 as part of the Guidant transaction (refer
to Note D –
Acquisitions) and acquired the Vascular Surgery business in
1995.
Fluid
Management and Venous Access
In
February 2008, we completed the sale of our Fluid Management and Venous Access
businesses to Navylist Medical (affiliated with Avista Capital Partners) for net
cash proceeds of approximately $400 million. We did not adjust the carrying
value of the Fluid Management and Venous Access disposal group as of December
31, 2007, because the fair value of the disposal group, less costs to sell,
exceeded its carrying value. We recorded a pre-tax gain of $234 million ($161
million after-tax) during 2008 associated with this transaction. We acquired the
Fluid Management business as part of our acquisition of Schneider Worldwide in
1998. The Venous Access business was previously a component of our Oncology
business.
TriVascular
EVAR Program
In March
2008, we sold our EVAR program obtained in connection with our 2005 acquisition
of TriVascular, Inc. for $30 million in cash. We discontinued our EVAR program
in 2006. In connection with the sale, we recorded a pre-tax gain of $16 million
($36 million after-tax) during 2008.
The
combined assets held for sale and liabilities associated with the assets held
for sale included in the accompanying consolidated balance sheets consist of the
following:
109
|
As
of December 31,
|
||||||||
|
(in
millions)
|
2008
|
2007
|
||||||
|
Trade
accounts receivable, net
|
$ | 41 | ||||||
|
Inventories
|
71 | |||||||
|
Prepaid
expenses and other current assets
|
3 | |||||||
|
Property,
plant and equipment, net
|
$ | 13 | 107 | |||||
|
Goodwill
|
313 | |||||||
|
Other
intangible assets, net
|
581 | |||||||
|
Other
long-term assets
|
3 | |||||||
|
Assets
held for sale
|
$ | 13 | $ | 1,119 | ||||
|
Accounts
payable and accrued expenses
|
$ | 32 | ||||||
|
Other
current liabilities
|
6 | |||||||
|
Other
non-current liabilities
|
1 | |||||||
|
Liabilities
associated with assets held for sale
|
$ | 39 | ||||||
The
tangible assets and liabilities presented in the table above are primarily U.S.
assets and liabilities and are included in our United States reportable
segment.
The
combined 2007 revenues associated with the disposal groups were $553 million, or
seven percent of our net sales.
Note
G – Investments and Notes Receivable
We have
historically entered a significant number of alliances with publicly traded
and privately held entities in order to broaden our product technology
portfolio and to strengthen and expand our reach into existing and new markets.
During 2007, in connection with our strategic initiatives, we announced our
intent to sell the majority of our investment portfolio in order to monetize
those investments determined to be non-strategic.
In June
2008, we signed definitive agreements with Saints Capital and Paul Capital
Partners to sell the majority of our investments in, and notes receivable from,
certain publicly traded and privately held entities for gross proceeds of
approximately $140 million. In connection
with these agreements we have received proceeds of $95 million as of December
31, 2008. In addition, we received proceeds of $54 million from other
transactions to monetize certain other non-strategic investments and notes
receivable during 2008.
We
recorded total other-than-temporary impairments of $130 million during 2008,
including $127 million related to non-strategic investments and notes
receivable, which we have sold or intend to sell, and $3 million related to our
strategic equity investments. Our 2008 other-than-temporary impairments included
$112 million of impairments related to privately held entities, and $18 million
of impairments related to publicly traded entities. In addition, we recorded
gains of $52 million on the sale of non-strategic investments during 2008. We
also recognized other costs of $5 million associated with the Saints and Paul
agreements. During 2007, we recorded other-than-temporary impairments of $119
million related to our investments and notes receivable, and recorded gains of
$65 million associated with the sale of equity investments and collection of
notes receivable. During 2006, we recorded $122 million of total
other-than-temporary impairments of our investments and notes receivable and
recorded gains of $13 million associated with the sale of equity investments.
Losses and gains associated with our investments and notes receivable are
recorded in Other, net within our consolidated statements of
operations.
Many of
our alliances involve equity investments in privately held equity securities or
investments where an observable quoted market value does not exist. Many of
these companies are in the developmental stage and
110
have not
yet commenced their principal operations. Our exposure to losses related to our
alliances is generally limited to our equity investments and notes receivable
associated with these alliances. Our equity investments in alliances consist of
the following:
|
As
of December 31,
|
||||||||
|
(in
millions)
|
2008
|
2007
|
||||||
|
Available-for-sale
investments
|
||||||||
|
Carrying
value
|
$ | 1 | $ | 18 | ||||
|
Gross
unrealized gains
|
26 | |||||||
|
Gross
unrealized losses
|
||||||||
|
Fair
value
|
1 | 44 | ||||||
|
Equity
method investments
|
||||||||
|
Carrying
value
|
45 | 60 | ||||||
|
Cost
method investments
|
||||||||
|
Carrying
value
|
67 | 213 | ||||||
| $ | 113 | $ | 317 | |||||
As of
December 31, 2008, we held $45 million of investments that we accounted for
under the equity method. Our ownership percentages in these entities ranges from
approximately five percent to 18 percent. In accordance with EITF
Issue No. 03-16, Accounting
for Investments in Limited Liability Companies, and EITF Topic D-46,
Accounting for Limited
Partnership Investments, we account for these investments under the
equity method of accounting. We recorded losses of $10 million, reported in
Other, net, associated with the application of the equity method of accounting
to these investments in 2008. We recorded $13 million of purchased research and
development associated with the initial application of the equity method of
accounting to certain investments in 2007; other income (expense) associated
with equity method adjustments in 2007 was less than $1 million in the
aggregate.
We had
notes receivable of approximately $46 million at December 31, 2008 and $61
million at December 31, 2007 due from certain companies. In addition, we
had approximately $20 million of cost method investments recorded in other
current assets in our consolidated balance sheets as of December 31, 2008 as
these investments will be monetized in 2009 pursuant to our definitive agreement
with Saints.
Note
H – Restructuring-related Activities
In
October 2007, our Board of Directors approved, and we committed to, an expense
and head count reduction plan, which resulted in the elimination of
approximately 2,300 positions worldwide. We are providing affected employees
with severance packages, outplacement services and other appropriate assistance
and support. The plan is intended to bring expenses in line with
revenues as part of our initiatives to enhance short- and long-term shareholder
value. Key activities under the plan include the restructuring of several
businesses, corporate functions and product franchises in order to better
utilize resources, strengthen competitive positions, and create a more
simplified and efficient business model; the elimination, suspension or
reduction of spending on certain R&D projects; and the transfer of certain
production lines from one facility to another. We initiated these activities in
the fourth quarter of 2007 and expect to be substantially complete worldwide in
2010.
We expect
that the execution of this plan will result in total pre-tax expenses of
approximately $425 million to $450 million. We are recording a
portion of these expenses as restructuring charges and the remaining portion
through other lines within our consolidated statements of operations. We
expect the plan to result in cash payments of approximately $395 million to $415
million. The following provides a summary of our expected total costs
associated with the plan by major type of cost:
111
|
Type
of cost
|
Total
estimated amount expected to be incurred
|
|
Restructuring
charges:
|
|
|
Termination
benefits
|
$225
million to $230 million
|
|
Fixed
asset write-offs
|
$20
million
|
|
Other
(1)
|
$65
million to $70 million
|
|
Restructuring-related
expenses:
|
|
|
Retention
incentives
|
$75
million to $80 million
|
|
Accelerated
depreciation
|
$10
million to $15 million
|
|
Transfer
costs (2)
|
$30
million to $35 million
|
|
$425
million to $450 million
|
| (1) | Consists primarily of consulting fees and contractual cancellations. | |
|
|
(2)
|
Consists
primarily of costs to transfer product lines from one facility to another,
including costs of transfer teams, freight and product line
validations.
|
During
2008, we recorded $78 million of restructuring charges. In addition,
we recorded $55 million of expenses within other lines of our consolidated
statements of operations related to our restructuring initiatives. The following
presents these costs by major type and line item within our consolidated
statements of operations:
|
(in
millions)
|
Termination
Benefits
|
Retention
Incentives
|
Asset
Write-offs
|
Accelerated
Depreciation
|
Transfer
Costs
|
Other
|
Total
|
|||||||||||||||||||||
|
Restructuring
charges
|
$ | 34 | $ | 10 | $ | 34 | $ | 78 | ||||||||||||||||||||
|
Restructuring-related
expenses:
|
||||||||||||||||||||||||||||
|
Cost
of products sold
|
$ | 9 | $ | 4 | $ | 4 | 17 | |||||||||||||||||||||
|
Selling,
general and administrative expenses
|
27 | 4 | 31 | |||||||||||||||||||||||||
|
Research
and development expenses
|
7 | 7 | ||||||||||||||||||||||||||
| 43 | 8 | 4 | 55 | |||||||||||||||||||||||||
| $ | 34 | $ | 43 | $ | 10 | $ | 8 | $ | 4 | $ | 34 | $ | 133 | |||||||||||||||
During
2007, we recorded $176 million of restructuring charges, and $8 million of
restructuring-related expenses within other lines of our consolidated statements
of operations. The following presents these costs by major type and line item
within our consolidated statements of operations:
|
(in
millions)
|
Termination
Benefits
|
Retention
Incentives
|
Asset
Write-offs
|
Accelerated
Depreciation
|
Transfer
Costs
|
Other
|
Total
|
|||||||||||||||||||||
|
Restructuring
charges
|
$ | 158 | $ | 8 | $ | 10 | $ | 176 | ||||||||||||||||||||
|
Restructuring-related
expenses:
|
||||||||||||||||||||||||||||
|
Cost
of products sold
|
$ | 1 | $ | 1 | 2 | |||||||||||||||||||||||
|
Selling,
general and administrative expenses
|
2 | $ | 2 | 4 | ||||||||||||||||||||||||
|
Research
and development expenses
|
2 | 2 | ||||||||||||||||||||||||||
| 5 | 3 | 8 | ||||||||||||||||||||||||||
| $ | 158 | $ | 5 | $ | 8 | $ | 3 | $ | 10 | $ | 184 | |||||||||||||||||
112
The
termination benefits recorded during 2008 and 2007 represent amounts incurred
pursuant to our on-going benefit arrangements and amounts for “one-time”
involuntary termination benefits, and have been recorded in accordance with FASB
Statement No. 112, Employer’s
Accounting for Postemployment Benefits and FASB Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. We expect to record the additional
termination benefits in 2009 when we identify with more specificity the job
classifications, functions and locations of the remaining head count to be
eliminated. Retention incentives represent cash incentives, which are
being recorded over the future service period during which eligible employees
must remain employed with us in order to retain the payment. The
other restructuring costs, which, in 2008 and 2007, represented primarily
consulting fees, are being recognized and measured at their fair value in the
period in which the liability is incurred in accordance with FASB Statement No.
146.
We have incurred cumulative restructuring and restructuring-related costs of $317 million since we committed to the plan in October 2007. The following presents these costs by major type (in millions):
|
Termination
benefits
|
$ | 192 | ||
|
Retention
incentives
|
48 | |||
|
Fixed
asset write-offs
|
18 | |||
|
Accelerated
depreciation
|
11 | |||
|
Transfer
costs
|
4 | |||
|
Other
|
44 | |||
| $ | 317 |
In 2008,
we made cash payments of approximately $185 million associated with our
restructuring initiatives, which related to termination benefits and retention
incentives paid and other restructuring charges. We have made
cumulative cash payments of approximately $230 million since we committed to our
restructuring initiatives in October 2007. These payments were made using cash
generated from our operations. We expect to record the remaining
costs associated with these restructuring initiatives through 2009 and make the
remaining cash payments throughout 2009 and 2010 using cash generated from
operations.
Costs
associated with restructuring and restructuring-related activities are excluded
from the determination of segment income, as they do not reflect expected
on-going future operating expenses and are not considered by management when
assessing operating performance.
The
following is a rollforward of the liability associated with our restructuring
initiatives since the inception of the plan in the fourth quarter of 2007, which
is reported as a component of accrued expenses included in our accompanying
consolidated balance sheets.
|
(in
millions)
|
Termination
Benefits
|
Other
|
Total
|
|||||||||
|
Charges
|
$ | 158 | $ | 10 | $ | 168 | ||||||
|
Cash
payments
|
(23 | ) | (8 | ) | (31 | ) | ||||||
|
Balance
at December 31, 2007
|
135 | 2 | 137 | |||||||||
|
Charges
|
34 | 34 | 68 | |||||||||
|
Cash
payments
|
(128 | ) | (35 | ) | (163 | ) | ||||||
|
Balance
at December 31, 2008
|
$ | 41 | $ | 1 | $ | 42 | ||||||
In
addition to the amounts in the rollforward above, we have incurred cumulative
charges of $81 million associated with retention incentives, product transfer
costs, asset write-offs and accelerated depreciation; and have made cumulative
cash payments of $32 million associated with retention incentives and $4 million
associated with product transfer costs.
113
Plant
Network Optimization
On
January 27, 2009, our Board of Directors approved, and we committed to, a plant
network optimization plan, which is intended to simplify our manufacturing plant
structure by transferring certain production lines from one facility to another
and by closing certain facilities. The plan is a complement to our previously
announced expense and head count reduction plan, and is intended to improve
overall gross profit margins. Activities under the plan will be initiated in
2009 and are expected to be substantially completed by the end of
2011.
We
estimate that the plan will result in total pre-tax charges of approximately
$135 million to $150 million, and that approximately $120 million to $130
million of these charges will result in future cash outlays. The
following provides a summary of our estimates of costs associated with the plan
by major type of cost:
|
Type
of cost
|
Total
estimated amount expected to be incurred
|
|
Restructuring
charges:
|
|
|
Termination
benefits
|
$45
million to $50 million
|
|
Restructuring-related
expenses:
|
|
|
Accelerated
depreciation
|
$15
million to $20 million
|
|
Transfer
costs (1)
|
$75
million to $80 million
|
|
$135
million to $150 million
|
|
(1)
|
Consists
primarily of costs to transfer product lines from one facility to another,
including costs of transfer teams, freight and product line
validations.
|
The
estimated restructuring charges relate primarily to termination benefits to be
recorded pursuant to FASB Statement No. 112, Employer’s Accounting for
Postemployment Benefits and FASB Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. The accelerated depreciation will be
recorded through cost of products sold over the new remaining useful life of the
related assets and the production line transfer costs will be recorded through
cost of products sold as incurred.
Note I—Borrowings
and Credit Arrangements
We had
total debt of $6.745 billion at December 31, 2008 at an average interest rate of
5.65 percent, as compared to total debt of $8.189 billion at December 31,
2007 at an average interest rate of 6.36 percent. Our borrowings consist of
the following:
114
|
As
of December 31,
|
||||||||
|
(in
millions)
|
2008
|
2007
|
||||||
|
Current debt
obligations
|
||||||||
|
Credit
and security facility
|
$ | 250 | ||||||
|
Other
|
$ | 2 | 6 | |||||
| 2 | 256 | |||||||
|
Long-term debt
obligations
|
||||||||
|
Term
loan
|
2,825 | 4,000 | ||||||
|
Abbott
loan
|
900 | 900 | ||||||
|
Senior
notes
|
3,050 | 3,050 | ||||||
|
Fair
value adjustment (1)
|
(8 | ) | (9 | ) | ||||
|
Discounts
|
(30 | ) | (42 | ) | ||||
|
Capital
leases
|
28 | |||||||
|
Other
|
6 | 6 | ||||||
| 6,743 | 7,933 | |||||||
| $ | 6,745 | $ | 8,189 | |||||
|
(1)
|
Represents
unamortized losses related to interest rate swaps used to hedge the fair
value of certain of our senior
notes. See Note
C - Fair Value Measurements for further discussion regarding
the accounting treatment of
our interest rate
swaps.
|
In April
2006, to finance the cash portion of our acquisition of Guidant, we borrowed
$6.6 billion, consisting of a $5.0 billion five-year term loan and a $700
million 364-day interim credit facility loan from a syndicate of commercial and
investment banks, as well as a $900 million subordinated loan from Abbott. In
addition, we terminated our existing revolving credit facilities and established
a new $2.0 billion revolving credit facility. In May 2006, we repaid and
terminated the $700 million 364-day interim credit facility loan and terminated
the credit facility. Additionally, in June 2006, under our shelf registration
previously filed with the SEC, we issued $1.2 billion of publicly registered
senior notes. Refer to the Senior Notes section below
for the terms of this issuance.
As of
December 31, 2008, the debt maturity schedule for our term loan, as well as
scheduled maturities of the other significant components of our debt
obligations, is as follows:
|
(in
millions)
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Term
loan
|
$ | 825 | $ | 2,000 | $ | 2,825 | ||||||||||||||||||||||
|
Abbott
loan
|
900 | 900 | ||||||||||||||||||||||||||
|
Senior
notes
|
850 | $ | 2,200 | 3,050 | ||||||||||||||||||||||||
| $ | $ | 825 | $ | 3,750 | $ | $ | $ | 2,200 | $ | 6,775 | ||||||||||||||||||
|
|
Note:
|
The
table above does not include discounts associated with our Abbott loan and
senior notes, or amounts related to interest rate swaps used to hedge the
fair value of certain of our senior
notes.
|
Term
Loan and Revolving Credit Facility
In April
2006, we established our $2.0 billion, five-year revolving credit facility. Use
of the borrowings is unrestricted and the borrowings are unsecured. In October
of 2008, we issued a $717 million surety bond backed by a $702 million letter of
credit and $15 million of cash to secure a damage award related to the Johnson
& Johnson patent infringement case pending appeal, described in Note L – Commitments and
Contingencies, reducing the credit availability under the revolving
facility. There were no
amounts borrowed under this facility as of December 31, 2008 and
2007.
115
We are
permitted to prepay the term loan prior to maturity with no penalty or premium.
During 2007, we prepaid $1.0 billion of our five-year term loan, using $750
million of cash on hand and $250 million in borrowings against our credit
facility secured by our U.S. trade receivables (refer to Other Credit Facilities
section for more information on this facility). During 2008, we made
prepayments of $1.175 billion. These additional prepayments satisfied the
remaining $300 million of our term loan due in 2009 and $875 million of our term
loan due in 2010.
In
February 2009, we amended our term loan and revolving credit facility agreement
to increase flexibility under our financial covenants. The amendment
provides for an exclusion from the calculation of consolidated EBITDA, as
defined by the amended agreement, through the credit agreement maturity in
April 2011, of up to $346 million in restructuring charges to support our
plant network optimization and other expense reduction initiatives; an
exclusion for any litigation-related charges and credits until such items are
paid or received; and an exclusion of up to $1.137 billion of any cash
payments for litigation settlements or damage awards (net of any litigation
payments received), and all cash payments (net of cash receipts) related to
amounts that were recorded in the financial statements before January 1,
2009. At the same
time, we prepaid $500 million of our term loan and reduced our
revolving credit facility by $250 million. As a result, our next debt
maturity of $325 million is due in April 2010. In addition, the
agreement provides for an increase in interest rates on our term loan borrowings
from LIBOR plus 1.00 percent to LIBOR plus 1.75 percent at current credit
ratings. Further, the interest rate on unused facilities increases from 0.175
percent to 0.500 percent.
Abbott
Loan
The $900
million loan from Abbott bears interest at a fixed 4.0 percent rate, payable
semi-annually. The loan is subordinated to our senior, unsecured,
subsidiary indebtedness. We are permitted to prepay the Abbott loan prior
to maturity with no penalty or premium. We determined that an appropriate fair
market interest rate on the loan from Abbott was 5.25 percent per annum. We
recorded the loan at a discount of approximately $50 million at the inception of
the loan and are recording interest at an imputed rate of 5.25 percent over the
term of the loan. The remaining discount as of December 31, 2008 is $24
million.
Other
Credit Facilities
We
maintain a $350 million credit and security facility secured by our U.S. trade
receivables. Use of the borrowings is unrestricted. Borrowing availability under
this facility changes based upon the amount of eligible receivables,
concentration of eligible receivables and other factors. Certain significant
changes in the quality of our receivables may require us to repay borrowings
immediately under the facility. The credit agreement required us to create a
wholly owned entity, which we consolidate. This entity purchases our U.S. trade
accounts receivable and then borrows from two third-party financial institutions
using these receivables as collateral. The receivables and related borrowings
remain on our consolidated balance sheets because we have the right to prepay
any borrowings and effectively retain control over the receivables. Accordingly,
pledged receivables are included as trade accounts receivable, net, while the
corresponding borrowings are included as debt on our consolidated balance
sheets. There were $250 million in borrowings outstanding under this facility at
December 31, 2007. During 2008, we repaid those amounts outstanding and extended
the maturity of this facility to August 2009. There were no amounts outstanding
under this facility at December 31, 2008.
Further,
we have uncommitted credit facilities with two commercial Japanese banks that
provide for borrowings and promissory notes discounting of up to 18.5 billion
Japanese yen (translated to approximately $205 million at December 31,
2008). During 2008, we increased available borrowings under this facility from
15 billion Japanese yen (translated to $133 million at December 31, 2007). We
discounted $190 million of notes receivable as of December 31, 2008 at an
average interest rate of 1.13 percent and $109 million of notes receivable
as of December 31, 2007 at an average interest rate of 1.15 percent.
Discounted notes receivable are excluded from accounts receivable in the
accompanying consolidated balance sheets.
116
At
December 31, 2008, we had outstanding letters of credit of approximately $819
million, as compared to approximately $110 million at December 31, 2007, which
consisted primarily of bank guarantees and collateral for workers’
compensation programs. The increase is due primarily to a $702
million letter of credit entered into in 2008 in conjunction with the Johnson
& Johnson patent infringement case. We have accrued amounts associated with
this case in our accompanying consolidated balance sheets. As of December 31,
2008, none of the beneficiaries had drawn upon the letters of credit or
guarantees. Accordingly, we have not recognized a related liability in our
consolidated balance sheets as of December 31, 2008 or 2007. We believe we
have sufficient cash on hand and intend to fund these payments without drawing
on the letters of credit.
Senior
Notes
We had
senior notes of $3.050 billion outstanding at December 31, 2008 and
2007. These notes are publicly registered securities, are redeemable prior to
maturity and are not subject to any sinking fund requirements. Our senior notes
are unsecured, unsubordinated obligations and rank on a parity with each other.
These notes are effectively junior to borrowings under our credit and
security facility and liabilities of our subsidiaries, including our term loan
and the Abbott loan. Our senior notes consist of the
following:
|
Amount
(in
millions)
|
Issuance
Date
|
Maturity
Date
|
Semi-annual
Coupon
Rate
|
|||||
|
January
2011 Notes
|
$ 250
|
November
2004
|
January
2011
|
4.250%
|
||||
|
June
2011 Notes
|
600
|
June
2006
|
June
2011
|
6.000%
|
||||
|
June
2014 Notes
|
600
|
June
2004
|
June
2014
|
5.450%
|
||||
|
November
2015 Notes
|
400
|
November
2005
|
November
2015
|
5.500%
|
||||
|
June
2016 Notes
|
600
|
June
2006
|
June
2016
|
6.400%
|
||||
|
January
2017 Notes
|
250
|
November
2004
|
January
2017
|
5.125%
|
||||
|
November
2035 Notes
|
350
|
November
2005
|
November
2035
|
6.250%
|
||||
|
$ 3,050
|
||||||||
In April
2006, we increased the interest rate payable on our November 2015 Notes and
November 2035 Notes by 0.75 percent to 6.25 percent and 7.0 percent,
respectively, in connection with credit ratings changes as a result of our
acquisition of Guidant. Rating changes throughout 2007 and 2008 had no
additional impact on the interest rates associated with our senior notes. At
December 31, 2008, our credit ratings from Standard & Poor’s Rating Services
(S&P) and Fitch Ratings were BB+, and our credit rating from Moody’s
Investor Service was Ba1. These ratings are below investment grade and the
ratings outlook by S&P and Moody’s is currently negative. During 2008, Fitch
increased our rating from negative outlook to stable. Credit rating changes may
impact our borrowing cost, but do not require the repayment of borrowings.
These credit rating changes have not materially increased the cost of our
existing borrowings. Subsequent rating improvements may result in a
decrease in the adjusted interest rate to the extent that our lowest credit
rating is above BBB- or Baa3. The interest rates on our November 2015 and
November 2035 Notes will be permanently reinstated to the issuance rate if the
lowest credit ratings assigned to these senior notes is either A- or A3 or
higher.
Debt
Covenants
Our term
loan and revolving credit facility agreement requires that we maintain certain
financial covenants, including a ratio of total debt to EBITDA, as defined by
the agreement, as amended, for the preceding four consecutive
fiscal quarters of less than or equal to 4.5 to 1.0 through December 31,
2008. The maximum permitted ratio of total debt to EBITDA steps-down to 4.0 to
1.0 on March 31, 2009 and to 3.5 to 1.0 on September 30, 2009. The agreement
also requires that we maintain a ratio of EBITDA, as defined by the agreement,
as amended, to interest expense for the preceding four consecutive
fiscal quarters of greater than or equal to 3.0 to 1.0. As of December 31,
2008, we were in compliance with the required covenants. Our ratio of total debt
to EBITDA was approximately 2.7 to 1.0 and our ratio of EBITDA to interest
expense was
117
approximately
5.4 to 1.0 as of December 31, 2008. If at any time we are not able to maintain
these covenants, we could be required to seek to renegotiate the terms of our
credit facilities or seek waivers from compliance with these covenants, both of
which could result in additional borrowing costs. Further, there can be no
assurance that our lenders would grant such waivers.
Note J—Leases
Rent
expense amounted to $92 million in 2008, $72 million in 2007, and $80 million in
2006.
Our
obligations under noncancelable capital leases were not material as of
December 31, 2008. Future minimum rental commitments at December 31,
2008 under other noncancelable lease agreements are as follows (in
millions):
|
2009
|
$ | 64 | ||
|
2010
|
56 | |||
|
2011
|
45 | |||
|
2012
|
35 | |||
|
2013
|
26 | |||
|
Thereafter
|
57 | |||
| $ | 283 |
Note
K – Income Taxes
Our
(loss) income before income taxes consisted of the following:
|
Year
Ended December 31,
|
||||||||||||
|
(in
millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Domestic
|
$ | (3,018 | ) | $ | (1,294 | ) | $ | (4,535 | ) | |||
|
Foreign
|
987 | 725 | 1,000 | |||||||||
| $ | (2,031 | ) | $ | (569 | ) | $ | (3,535 | ) | ||||
The
related provision for income taxes consists of the following:
|
Year
Ended December 31,
|
||||||||||||
|
(in
millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Current
|
||||||||||||
|
Federal
|
$ | 110 | $ | 99 | $ | 375 | ||||||
|
State
|
27 | 46 | 53 | |||||||||
|
Foreign
|
189 | 167 | 34 | |||||||||
| 326 | 312 | 462 | ||||||||||
|
Deferred
|
||||||||||||
|
Federal
|
(279 | ) | (345 | ) | (421 | ) | ||||||
|
State
|
(20 | ) | (20 | ) | (24 | ) | ||||||
|
Foreign
|
(22 | ) | (21 | ) | 25 | |||||||
| (321 | ) | (386 | ) | (420 | ) | |||||||
| $ | 5 | $ | (74 | ) | $ | 42 | ||||||
118
|
2008
|
2007
|
2006
|
||||||||||
|
U.S.
federal statutory income tax rate
|
(35.0 | ) % | (35.0 |
)
%
|
(35.0 | ) % | ||||||
|
State
income taxes, net of federal benefit
|
0.4 |
%
|
4.0 |
%
|
0.5 |
%
|
||||||
|
Effect
of foreign taxes
|
(5.9 | ) % | (41.9 |
)
%
|
(6.1 | ) % | ||||||
|
Non-deductible
acquisition expenses
|
0.5 |
%
|
5.4 |
%
|
40.8 |
%
|
||||||
|
Research
credit
|
(0.5 | ) % | (2.4 |
)
%
|
(0.6 | ) % | ||||||
|
Valuation
allowance
|
2.9 |
%
|
19.6 |
%
|
2.2 |
%
|
||||||
|
Divestitures
|
(9.9 | ) % | 33.2 |
%
|
||||||||
|
Intangible
asset impairments
|
46.5 |
%
|
||||||||||
|
Section
199
|
(2.2 |
)
%
|
(0.5 | ) % | ||||||||
|
Tax
liability release on unremitted earnings
|
(3.8 | ) % | ||||||||||
|
Sale
of intangible assets
|
3.3 |
%
|
||||||||||
|
Other,
net
|
1.2 |
%
|
6.3 |
%
|
0.4 |
%
|
||||||
| 0.2 |
%
|
(13.0 |
)
%
|
1.2 |
%
|
|||||||
Significant
components of our deferred tax assets and liabilities are as
follows:
|
As
of December 31,
|
||||||||
|
(in
millions)
|
2008
|
2007
|
||||||
|
Deferred
tax assets
|
||||||||
|
Inventory
costs, intercompany profit and related reserves
|
$ | 297 | $ | 250 | ||||
|
Tax
benefit of net operating loss, capital loss and tax
credits
|
294 | 267 | ||||||
|
Reserves
and accruals
|
392 | 573 | ||||||
|
Restructuring-
and acquisition-related charges, including purchased
research and development
|
115 | 112 | ||||||
|
Litigation
and product liability reserves
|
188 | 82 | ||||||
|
Unrealized
losses on derivative financial instruments
|
15 | 34 | ||||||
|
Investment
writedown
|
59 | 107 | ||||||
|
Stock-based
compensation
|
86 | 84 | ||||||
|
Federal
benefit of uncertain tax positions
|
117 | 114 | ||||||
|
Other
|
34 | 17 | ||||||
| 1,597 | 1,640 | |||||||
|
Less:
valuation allowance on deferred tax assets
|
252 | 193 | ||||||
| 1,345 | 1,447 | |||||||
|
Deferred
tax liabilities
|
||||||||
|
Property,
plant and equipment
|
52 | 51 | ||||||
|
Intangible
assets
|
2,617 | 2,967 | ||||||
|
Litigation
settlement
|
25 | 24 | ||||||
|
Unrealized
gains on available-for-sale securities
|
10 | |||||||
|
Other
|
2 | |||||||
| 2,696 | 3,052 | |||||||
| $ | (1,351 | ) | $ | (1,605 | ) | |||
At
December 31, 2008, we had U.S. tax net operating loss, capital loss and tax
credit carryforwards, the tax effect of which was $45 million, as compared to
$79 million at December 31, 2007. In addition, we had foreign tax net operating
loss carryforwards, the tax effect of which was $249 million at December
31, 2008, as compared to $188 million at December 31, 2007. These carryforwards
will expire periodically beginning in 2009. We established a valuation allowance
of $252 million against these carryforwards as of December 31, 2008 and
$193 million as of December 31, 2007, due to our determination, after
consideration of all positive and negative evidence, that it is more likely than
not a portion of the carryforwards will not be realized. The increase in the
valuation allowance at December 31, 2008 as compared to December 31, 2007 is
attributable primarily to foreign net operating losses generated during the
year.
119
The
income tax impact of the unrealized gain or loss component of other
comprehensive income was a provision of less than $1 million in 2008, a benefit
of $53 million in 2007, and a benefit of $27 million in
2006.
We do not
provide income taxes on unremitted earnings of our foreign subsidiaries where we
have indefinitely reinvested such earnings in our foreign operations. It is not
practical to estimate the amount of income taxes payable on the earnings that
are indefinitely reinvested in foreign operations. Unremitted earnings of our
foreign subsidiaries that we have indefinitely reinvested offshore are $9.327
billion at December 31, 2008 and $7.804 billion at December 31,
2007.
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes. At December 31, 2008, we had $1.107 billion of gross unrecognized
tax benefits, $978 million of which, if recognized, would affect our effective
tax rate. At December 31, 2007, we had $1.180 billion of gross unrecognized tax
benefits, $415 million of which, if recognized, would affect our effective tax
rate. The gross unrecognized tax benefits decreased at December 31, 2008, as
compared to December 31, 2007, due principally to the resolution of federal,
state and foreign examinations for both Boston Scientific and Guidant for the
years 1998 through 2005, as discussed below. The unrecognized tax benefits
which, if recognized, would impact our effective rate increased at December 31,
2008, as compared to December 31, 2007 due to the adoption of FASB Statement
No. 141(R), Business
Combinations, as of January 1, 2009, which requires that we recognize
changes in acquired income tax uncertainties (applied to acquisitions before and
after the adoption date) as income tax expense or benefit. A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in millions):
|
2008
|
2007
|
|||||||
|
Balance
as of January 1
|
$ | 1,180 | $ | 1,155 | ||||
|
Additions
based on positions related to the current year
|
128 | 80 | ||||||
|
Additions
for tax positions of prior years
|
48 | 60 | ||||||
|
Reductions
for tax positions of prior years
|
(161 | ) | (47 | ) | ||||
|
Settlements
with Taxing Authorities
|
(82 | ) | (61 | ) | ||||
|
Statute
of limitation expirations
|
(6 | ) | (7 | ) | ||||
|
Balance
as of December 31
|
$ | 1,107 | $ | 1,180 | ||||
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 2000. Substantially all material state, local, and
foreign income tax matters have been concluded for all years though
2001.
During
2008, we resolved certain matters in federal, state, and foreign jurisdictions
for Guidant and Boston Scientific for the years 1998 to 2005. We
settled multiple federal issues at the IRS examination and Appellate levels,
including issues related to Guidant’s acquisition of Intermedics, Inc., and
various litigation settlements. We also received favorable foreign court
decisions and a favorable outcome related to our foreign research credit
claims. As a result of these audit activities, we decreased our
reserve for uncertain tax positions, excluding tax payments, by $156 million,
inclusive of $37 million of interest and penalties during 2008. During 2007, we
settled several audits, obtained an Advance Pricing Agreement between the U.S.
and Japan, and received a favorable appellate court decision on a previously
outstanding Japan matter with respect to the 1995 to 1998 tax
periods. As a result of settlement of these matters, we decreased our
reserve for uncertain tax positions, excluding tax payments, by $31 million,
inclusive of $29 million of interest and penalties.
During
2008, we received the Revenue Agent’s Report for Guidant’s federal examination
covering years 2001 through 2003, which contained significant proposed
adjustments related primarily to the allocation of income between our U.S. and
foreign affiliates. We disagree with the proposed adjustment and we
intend to contest this matter through applicable IRS and judicial procedures, as
appropriate. Although the final resolution of the proposed
adjustments is uncertain, we believe that our income tax reserves are adequate
and that the resolution will not have a material impact on our financial
condition or results of operations.
120
It is
reasonably possible that within the next 12 months we will resolve multiple
issues including transfer pricing, research and development credit and
transactional related issues, with foreign, federal and state taxing
authorities, in which case we could record a reduction in our balance of
unrecognized tax benefits of up to approximately $176 million.
Our
historical practice was and continues to be to recognize interest and penalties
related to income tax matters in income tax expense (benefit). We had
$268 million accrued for gross interest and penalties at December 31, 2008 and
$264 million at December 31, 2007. The increase in gross interest and
penalties was a result of $43 million recognized in our consolidated statements
of operations, partially offset by a $39 million reduction, due primarily to
payments. The total amount of interest and penalties recognized in our
consolidated statements of operations in 2007 was $76 million.
Note L—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 our competitors 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 and could have a material
adverse effect on our financial position, results of operations or
liquidity.
In
particular, we are engaged in significant patent litigation with Johnson
& Johnson relating to stent systems, balloon catheters and stent delivery
systems. We have each asserted that products of the other infringe patents
owned or exclusively licensed by each of us. Adverse outcomes in one or
more of these matters could have a material adverse effect on our ability to
sell certain products and on our operating margins, financial position, results
of operation or liquidity.
In the
normal course of business, product liability and securities claims are asserted
against us. In addition, requests for information from governmental entities
have increased in recent years which may evolve into legal proceedings. Product
liability and securities claims may be asserted against us and requests for
information may be received in the future related to events not known to
management at the present time. We are substantially self-insured with respect
to product liability claims, and maintain an insurance policy providing limited
coverage against securities claims. The absence of significant third-party
insurance coverage increases our potential exposure to unanticipated claims or
adverse decisions. Product liability
121
claims,
product recalls, securities litigation, requests for information and other legal
proceedings in the future, regardless of their outcome, could have a material
adverse effect on our financial position, results of operations or
liquidity.
Our
accrual for legal matters that are probable and estimable was $1.089 billion at
December 31, 2008 and $994 million at December 31, 2007, and includes
estimated costs of settlement, damages and defense. The increase in
our accrual is due primarily to a pre-tax charge of $334 million resulting from
a ruling by a federal judge in a patent infringement case brought against us by
Johnson & Johnson, which we recorded during the third quarter of 2008.
Partially offsetting this increase was a reduction of $187 million as result of
payments made during the fourth quarter of 2008 related to the Guidant
multi-district litigation (MDL) settlement. In the first quarter of 2009, we
made an additional MDL payment of approximately $13 million, and anticipate
making the remaining payments of $20 million during the first half of 2009.
These amounts were both accrued as of December 31, 2008. We continue to assess
certain 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, cash flows and our ability to comply
with our debt covenants. See Note A - Significant Accounting
Policies for further discussion on our policy for accounting for legal,
product liability and security claims.
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 accrual as of December 31, 2008 or
otherwise indicated below, a range of loss associated with any individual
material legal proceeding can not be estimated.
Litigation
with Johnson & Johnson
On
October 22, 1997, Cordis Corporation, a subsidiary of Johnson &
Johnson, filed a suit for patent infringement against us and Boston Scientific
Scimed, Inc. (f/k/a 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 another suit
for patent infringement against Boston Scientific Scimed and us, 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 jury trial on both actions found that the NIR® stent infringed
one claim of one Cordis patent and awarded damages of approximately
$324 million to Cordis. On May 16, 2002, the Court 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. Our appeals of the infringement decision were denied.
On September 30, 2008, the District Court entered final judgment against us and
awarded Cordis $702 million in damages and interest. On October 10, 2008, we
appealed the damage award. As a result of the Court’s ruling, we increased our
accrual for litigation-related matters by $334 million in the third quarter of
2008. This accrual is in addition to $368 million of previously established
accruals related to this matter.
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 January 1999,
Johnson & Johnson amended the claims of the patent and changed the
action from a cross-border case to a Dutch national action. 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 and on October 8, 2008, the
Dutch Court found the patent valid.
On
August 22, 1997, Johnson & Johnson filed a suit for patent
infringement against us 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 April 30, 2008, the Court found that the
NIR® stent
did not infringe one patent of Johnson & Johnson and that the other Johnson
& Johnson patent was invalid. On May 30, 2008, Cordis filed an
appeal.
122
On
February 14, 2002, we, and certain of our subsidiaries, filed suit for
patent infringement against Johnson & Johnson and Cordis alleging that
certain balloon catheters and stent delivery systems sold by Johnson &
Johnson and Cordis infringe five U.S. patents owned by us. The complaint was
filed in the U.S. District Court for the Northern District of California seeking
monetary and injunctive relief. On October 15, 2002, Cordis filed a
counterclaim alleging that certain balloon catheters and stent delivery systems
sold by us infringe three U.S. patents owned by Cordis and seeking monetary and
injunctive relief. On December 6, 2002, we filed an amended complaint
alleging that two additional patents owned by us are infringed by the Cordis’
products. On October 31, 2007, a jury found that we infringe a patent of Cordis.
The jury also found four of our patents invalid and infringed by Cordis. No
damages were determined because the judge found that Cordis failed to submit
evidence sufficient to enable a jury to make a damage assessment. A hearing
on prospective relief was held on October 3, 2008, and an evidentiary hearing on
February 2, 2009.
On
March 26, 2002, we and our wholly owned subsidiary, Target
Therapeutics, Inc., filed suit for patent infringement against Cordis
alleging that certain detachable 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. Summary judgment motions with respect to one of the
patents were filed by both parties and on March 21, 2008, the Court found
infringement. Also, on January 18, 2008, the Court granted our motion for
summary judgment that Cordis infringes a second patent in the suit. Based
on this order, we have filed a motion for summary judgment of infringement of
the third patent in the suit, as well as a request to add infringement of
certain additional claims of the second patent. On August 15, 2008, the Court
granted our motion for summary judgment relating to infringement. Trial on
validity and damages is scheduled to begin on March 4, 2009.
On
January 13, 2003, Cordis filed suit for patent infringement against Boston
Scientific Scimed and us alleging that our Express2®
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® Express2®,
Express2®,
Express®
Biliary, and Liberté® stents infringe a Johnson & Johnson patent and
that the Liberté® stent infringes a second Johnson & Johnson patent.
The jury only determined liability; monetary damages would be determined at a
later trial. 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. Both parties appealed and a hearing was
held on December 2, 2008.
On
March 13, 2003, Boston Scientific Scimed and we 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. On July 1, 2005, a jury found that Johnson &
Johnson’s Cypher® drug-eluting stent infringes the original patent and upheld
the validity of the patent. The jury determined liability only; any monetary
damages would be determined at a later trial. On January 15, 2009, the U.S.
Court of Appeals reversed the lower Court’s decision and found the patent
invalid. On February 12, 2009, we filed a request for a rehearing and a
rehearing en banc with the U.S. Court of Appeals.
On
August 5, 2004, we (through our subsidiary Schneider Europe GmbH) filed
suit in the District Court of Brussels, Belgium 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
and seeking injunctive and monetary relief. On September 12, 2008, the District
Court issued a decision and ruled that a technical expert be appointed. On
December 1, 2008, we filed a partial appeal of the decision in the Brussels
Court of Appeals. In December 2005, the Johnson & Johnson
subsidiaries filed a nullity action in France. On January 25, 2008, we filed a
counterclaim infringement action in France, and a hearing is scheduled for
December 1, 2009. In
123
January 2006,
the same Johnson & Johnson subsidiaries filed nullity actions in Italy
and Germany. On October 23, 2007, the German Federal Patent Court found the
patent valid. We then filed a counterclaim infringement action in Italy and an
infringement action in Germany. On February 10, 2009, the District Court of
Dusseldorf issued an oral decision dismissing the German infringement
action.
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. An
appeal decision was received on March 15, 2007, finding the patent valid but not
infringed. We appealed the finding and a decision on our appeal is expected
during the second quarter of 2009.
On
September 27, 2004, Boston Scientific Scimed filed suit against a German
subsidiary of Johnson & Johnson alleging the Cypher® drug-eluting stent
infringes one of our European patents. The suit was filed in Mannheim, Germany
seeking monetary and injunctive relief. A hearing was held on September 21,
2007, in Mannheim, Germany, and a decision has not yet been
rendered.
On
November 29, 2007, Boston Scientific Scimed filed suit against a German
subsidiary of Johnson & Johnson alleging the Cypher® and Cypher® Select
drug-eluting stents infringe one of our European patents. The suit was filed in
Mannheim, Germany seeking monetary and injunctive relief. On October 17,
2008, the Court ruled that a technical expert be appointed to evaluate
infringement. A hearing has been scheduled for April 17, 2009.
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 Abbott and we 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. On
August 29, 2007, the judge dismissed the tortious interference claims against us
and Abbott and the implied duty of good faith and fair dealing claim against
Guidant. On February 20, 2009, Johnson & Johnson filed a motion to
amend its complaint to reinstate its tortious interference claims against us and
Abbott. We have not yet responded to the motion. A trial date
has not yet been scheduled.
On each
of May 25, June 1, June 22 and November 27, 2007, Boston Scientific Scimed and
we filed suit against Johnson & Johnson and Cordis in the U.S. District
Court for the District of Delaware seeking a declaratory judgment of invalidity
of a U.S. patent owned by them and of non-infringement of the patent by our
PROMUS® coronary stent system. On February 21, 2008, Cordis answered the
complaints, denying the allegations, and filed counterclaims for infringement
seeking an injunction and a declaratory judgment of validity. Trials on all
four suits are scheduled to begin on February 8, 2010.
On
January 15, 2008, Johnson & Johnson Inc. filed a suit for patent
infringement against us alleging that the sale of the Express®, Express2® and
TAXUS® Express2® stent
delivery systems infringe two 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 January
7, 2009, we answered the complaint denying the allegations.
On
February 1, 2008, Wyeth and Cordis Corporation filed an amended complaint
against Abbott Laboratories, adding us and Boston Scientific Scimed as
additional defendants to the complaint. The suit alleges that our PROMUS®
coronary stent system, upon launch in the United States, will infringe
three U.S. patents owned by Wyeth and licensed to Cordis. The suit was
filed in the United States District Court for the District of New Jersey seeking
monetary and injunctive relief. On May 23, 2008, we answered denying
allegations of the complaint and asserting a counterclaim of invalidity. A trial
has not yet been scheduled.
124
On
October 17, 2008, Cordis Corporation filed a complaint for patent infringement
against us alleging that our TAXUS® Liberté® stent product, when launched in the
United States, will infringe a U.S. patent owned by them. The suit was
filed in the United States District Court of Delaware seeking monetary and
injunctive relief. A preliminary injunction hearing is scheduled for March 23,
2009.
Litigation
with Medtronic, Inc.
On
December 17, 2007, Medtronic, Inc. filed a declaratory judgment action in the
District Court for Delaware against us, Guidant Corporation (Guidant), and
Mirowski Family Ventures L.L.C. (Mirowski), challenging its obligation to pay
royalties to Mirowski on certain cardiac resynchronization therapy devices by
alleging non-infringement and invalidity of certain claims of two patents owned
by Mirowski and exclusively licensed to Guidant and sublicensed to Medtronic. On
November 21, 2008, Medtronic filed an amended complaint adding unenforceability
of the patents. We answered the complaint on December 1, 2008.
Litigation with
St. Jude Medical, Inc.
Guidant
Sales Corp., Cardiac Pacemakers, Inc. (CPI) and Mirowski are plaintiffs in a
patent infringement suit originally filed against St. Jude Medical, Inc. and its
affiliates in November 1996 in the District Court in Indianapolis. On March 1,
2006, the District Court issued a ruling related to damages which granted St.
Jude’s motion to limit damages to a subset of the accused products but which
denied their motion to limit damages to only U.S. sales. On March 26, 2007, the
District Court issued a ruling which found the patent infringed but invalid. On
December 18, 2008, the Court of Appeals upheld the District Court’s ruling of
infringement and overturned the invalidity ruling. St. Jude and we have filed
requests for rehearing with the Court of Appeals.
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. On December 14, 2006, an appellate decision
was rendered upholding the trial court ruling. We appealed the Court’s decision
on March 14, 2007. We expect a decision on our appeal during the second quarter
of 2009.
On August
3, 2007, Medinol submitted a request for arbitration against us, and our wholly
owned subsidiaries Boston Scientific Ltd. and Boston Scientific
Scimed, Inc., under the Arbitration Rules of the World Intellectual
Property Organization pursuant to a settlement agreement between Medinol and us
dated September 21, 2005. The request for arbitration alleges that our
PROMUS® coronary stent system infringes five U.S. patents, three European
patents and two German patents owned by Medinol. Medinol is seeking to have the
patents declared valid and enforceable and a reasonable royalty. The September
2005 settlement agreement provides, among other things, that Medinol may only
seek reasonable royalties and is specifically precluded from seeking injunctive
relief. On June 29, 2008, the parties agreed that we can sell PROMUS® stent
systems in the United States supplied to us by Abbott. A hearing on the European
and German patents is scheduled to begin May 11, 2009.
On
December 12, 2008, we submitted a request for arbitration against Medinol with
the American Arbitration Association in New York. We are asking the Arbitration
panel to enforce a contract between Medinol and us to have Medinol contribute to
the final damage award owed to Johnson & Johnson for damages related to the
sales of the NIR stent supplied to us by Medinol.
Other
Stent System Patent Litigation
On
April 4, 2005, Angiotech and we filed suit against Sahajanand Medical
Technologies Pvt. Ltd. in The Hague, The Netherlands seeking a declaration
that Sahajanand’s drug-eluting stent products infringe patents owned by
Angiotech and licensed to us. On May 3, 2006, the Court found that the asserted
patents were
125
infringed
and valid, and provided for injunctive and monetary relief. On January 27, 2009,
the Court of Appeals affirmed that the patent was valid and infringed by
Sahajanand.
On
November 26, 2005, Angiotech and we filed suit against Occam International,
BV in The Hague, The Netherlands seeking a preliminary injunction against
Occam’s drug-eluting stent products based on infringement of patents owned by
Angiotech and licensed to us. On January 27, 2006, the Court denied our
request for a preliminary injunction. Angiotech and we have appealed the Court’s
decision, and the parties agreed to pursue normal infringement proceedings
against Occam in The Netherlands.
On
May 19, 2005, G. David Jang, M.D. filed suit against us alleging breach of
contract relating to certain patent rights 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. 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. On May 23, 2007, Jang
filed an appeal with respect to the remaining patent claims. On July 11, 2008,
the Court of Appeals vacated the District Court’s consent judgment and remanded
the case back to the District Court for further clarification.
On
December 16, 2005, Bruce N. Saffran, M.D., Ph.D. filed suit against us
alleging that our TAXUS® Express® coronary stent system infringes a patent owned
by Dr. Saffran. The suit was filed in the U.S. District Court for the
Eastern District of Texas and seeks monetary and injunctive relief. On February
11, 2008, the jury found that our TAXUS® Express® and TAXUS® Liberté® stent
products infringe Dr. Saffran’s patent and that the patent is valid. No
injunction was requested, but the jury awarded damages of $431 million. The
District Court awarded Dr. Saffran $69 million in pre-judgment interest and
entered judgment in his favor. On August 5, 2008, we filed an appeal with the
U.S. Court of Appeals for the Federal Circuit in Washington, D.C. A hearing
is set for March 2, 2009. On February 21, 2008, Dr. Saffran filed a new
complaint alleging willful infringement by the continued sale of the TAXUS®
stent products and on March 12, 2008, we answered denying the
allegations.
On
December 11, 2007, Wall Cardiovascular Technologies LLC filed suit against us
alleging that our TAXUS® Express® coronary stent system infringes a patent owned
by them. The complaint also alleges that Cordis Corporation’s drug-eluting
stent system infringes the patent. The suit was filed in the Eastern District
Court of Texas and seeks monetary and injunctive relief. Wall Cardiovascular
Technologies later amended its complaint to add Medtronic, Inc. to the suit with
respect to Medtronic’s drug-eluting stent system. A Markman hearing has been
scheduled for November 3, 2010. Trial is scheduled to begin on April 4,
2011.
On August
6, 2008, Boston Scientific Scimed and we filed suit against Wall Cardiovascular
Technologies, in the U.S. District Court for the District of Delaware
seeking a declaratory judgment of invalidity and unenforceability due to
inequitable conduct and prosecution history laches of a U.S. patent owned by
them, and of non-infringement of the patent by our PROMUS® coronary stent
system. On October 9, 2008, Wall filed a motion to dismiss. On January 2, 2009,
we filed an amended complaint to include noninfringement of the patent by our
TAXUS® Liberté® stent delivery system and to add Cardio Holdings LLC as a
defendant.
Other
Patent Litigation
On August
7, 2008, Thermal Scalpel LLC filed suit against us and numerous other medical
device companies alleging infringement of a patent related to an electrically
heated surgical cutting instrument exclusively licensed to them. The suit was
filed in the U.S. District Court for the Eastern District of Texas seeking
monetary and other further relief. A trial has been scheduled for March
2011.
CRM
Litigation
Approximately
76 product liability class action lawsuits and more than 2,250 individual
lawsuits involving approximately 5,554 individual plaintiffs are pending in
various state and federal jurisdictions against
126
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 approximately 244 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. 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. On
July 12, 2007, we reached an agreement to settle certain claims associated with
the 2005 and 2006 product communications, which was amended on November 19,
2007. Under the terms of the amended agreement, subject to certain conditions,
we will pay a total of up to $240 million covering up to 8,550 patient claims,
including all of the claims that have been consolidated in the MDL as well as
other filed and unfiled claims throughout the United States. 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 product
communications. The plaintiffs in those cases are eligible to participate in the
settlement, and activities in all Minnesota State court cases are currently
stayed pending individual plaintiff’s decisions whether to participate in the
settlement. We have made payments of approximately $220 million related to the
MDL settlement and, if certain agreed-upon requirements are met, may make
substantially all of the remaining $20 million payment during the first half of
2009.
We are
aware of more than 18 Guidant product liability lawsuits pending internationally
associated with defibrillators or pacemakers involved in the 2005 and 2006
product communications. Six of those suits pending in Canada are putative class
actions. On April 10, 2008, the Court certified a class of all persons in
whom defibrillators were implanted in Canada and a class of family members with
derivative claims. The second of these putative class actions encompasses all
persons in whom pacemakers were implanted in Canada. A hearing on whether the
pacemaker putative class action concluded on February 12, 2009.
Guidant
is a defendant in a complaint in which the plaintiff alleges a right of recovery
under the Medicare secondary payer (or MSP) private right of action, as well as
related claims. Plaintiff claims as damages double the amount paid by Medicare
in connection with devices that were the subject of the product communications.
The case is pending in the MDL in the United States District Court for the
District of Minnesota, subject to the general stay order imposed by the MDL
presiding judge.
Guidant or
its affiliates are defendants in two 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 product
communications. The 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. A hearing was held on
June 18, 2007, and a decision has not yet been rendered.
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 October 16,
2006, the United States filed a motion to intervene in this action, which was
approved by the Court on November 2, 2006.
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Securities
Related Litigation
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. Four other
plaintiffs, on behalf of themselves and all others similarly situated, each
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 16, 2008, the First Circuit reversed the dismissal of only
plaintiff’s TAXUS® stent recall related claims and remanded the matter for
further proceedings. On November 6, 2008, plaintiff filed a motion for class
certification and on February 25, 2009, the Court certified the class. A trial
has not yet been scheduled.
On
January 19, 2006, George Larson 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 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. Other similar
actions were filed in early 2006. On April 3, 2006, the Court issued an order
consolidating the actions. On August 23, 2006, plaintiffs filed a consolidated
purported class action complaint 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 “Consolidated ERISA Complaint”). The Consolidated ERISA
Complaint alleges, among other things, that the defendants breached their
fiduciary duties to the 401(k) Plan’s participants because they knew or should
have known that the value of the Company’s stock was artificially inflated and
was not a prudent investment for the 401(k) Plan. The Consolidated ERISA
Complaint seeks equitable and monetary relief. On June 30, 2008, Robert
Hochstadt (who previously had withdrawn as an interim lead plaintiff) filed a
motion to intervene to serve as a proposed class representative. On
November 3, 2008, the Court denied Plaintiffs’ motion to certify a class, denied
Hochstadt’s motion to intervene, and dismissed the action. On December 2, 2008,
plaintiffs filed a notice of appeal.
On
December 24, 2008, Robert Hochstadt and Edward Hazelrig, Jr. filed a purported
class action complaint in the U.S. District Court for the District of
Massachusetts on behalf of all participants and beneficiaries of our 401(k) Plan
during the period May 7, 2004 through January 26, 2006. This new complaint
repeats the allegations of the August 23, 2006, Consolidated ERISA Complaint. On
February 24, 2009, we responded to the complaint.
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
ERISA. 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. In September 2007, we filed a motion to
dismiss the complaint for failure to state a claim. In June 2008, the District
Court dismissed the complaint in part, but ruled that certain of the plaintiffs’
claims may go forward to discovery. On October 29, 2008, the Magistrate Judge
ruled that discovery should be limited, in the first instance, to alleged
damages-related issues.
128
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. 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. On February 27, 2008, the District Court granted the
motion to dismiss and entered final judgment in favor of all defendants. On
March 13, 2008, the plaintiffs filed a motion seeking to amend the final
judgment to permit the filing of a further amended complaint. On May 21, 2008,
the District Court denied plaintiffs motion to amend the judgment. On June 6,
2008, plaintiffs appealed the judgment to the United States Court of Appeals for
the Seventh Circuit. On January 16, 2009, the appeal was argued before a panel
of the Court.
Governmental
Proceedings – BSC
In
December 2007, we were informed by the Department of Justice that it is
conducting an investigation of allegations that we and other suppliers
improperly promoted biliary stents for off-label uses. On June 26, 2008,
the Department of Justice issued a subpoena to us under the Health Insurance
Portability & Accountability Act of 1996 requiring the production of
documents to the United States Attorney’s Office in the District of
Massachusetts. We are cooperating with the investigation.
On
February 26, 2008, fifteen pharmaceutical and medical device manufacturers,
including Boston Scientific, received a letter from Senator Charles E. Grassley,
ranking member of the United States Senate Committee on Finance regarding their
plans to enhance the transparency of financial relationships with physicians and
medical organizations. On March 7, 2008, we responded to the
Senator.
On June
27, 2008, the Republic of Iraq filed a complaint against us and ninety-two other
defendants in the U.S. District Court of the Southern District of New York. The
complaint alleges that the defendants acted improperly in connection with the
sale of products under the United Nations Oil for Food Program. The complaint
alleges RICO violations, conspiracy to commit fraud and the making of false
statements and improper payments, and seeks monetary and punitive damages. We
intend to vigorously defend against its allegations.
On
October 16, 2008, we received a letter from Senator Charles E. Grassley, ranking
member of the United States Senate Committee on Finance and Senator Herb
Kohl, Chairman, United States Senate Special Committee on Aging,
requesting information regarding payments made to the Cardiovascular
Research Foundation, Columbia University and certain affiliated
individuals. Additionally, the letter requests information regarding the COURAGE
trial. We are cooperating with the request.
On July
14, 2008, we received a subpoena from the State of New Hampshire, Office of the
Attorney General, requesting information in connection with our refusal to sell
medical devices or equipment intended to be used in the administration of spinal
cord stimulation trials to practitioners other than practicing medical doctors.
We are cooperating with the request.
On
November 13, 2008, we received a subpoena from the Attorney General of the State
of New York requesting
documents and information related to hedges and forward contracts primarily
concerning our executive officers and directors. We are cooperating with the
request.
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Governmental
Proceedings – Guidant
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. 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 the law.
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.
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 with the
requests.
On
January 16, 2007, the French Competition Council (Conseil de la Concurrence
which is one of the bodies responsible for the enforcement of
antitrust/competition law in France) issued a Statement of Objections alleging
that Guidant France SAS (“Guidant France”) had agreed with the four other main
suppliers of implantable cardiac defibrillators (“ICDs”) in France to
collectively refrain from responding to a 2001 tender for ICDs conducted by a
group of seventeen (17) University Hospital Centers in France. This alleged
collusion is alleged to be contrary to the French Commercial Code and Article 81
of the European Community Treaty. On December 19, 2007, the Council found
that the suppliers had violated competition law and assessed monetary fines,
however, each of the suppliers were fined amounts considerably less than
originally recommended. The French Ministry of the Economy and Finance filed an
incidental recourse seeking aggravated sanctions against all defendants. On
January 14, 2009, Guidant filed its rejoinder with the Paris Court of Appeals. A
trial was held on February 17, 2009, and a decision is expected on April 8,
2009.
On July
1, 2008, Guidant Sales Corporation received a subpoena from the Maryland office
of the Department of Health and Human Services, Office of Inspector General.
This subpoena seeks information concerning payments to physicians, primarily
related to the training of sales representatives. We are cooperating with this
request.
On
October 17, 2008, we received a subpoena from the U.S. Department of Health and
Human Services, Office of the Inspector General, requesting information related
to the alleged use of a skin adhesive in certain of our products. We are
cooperating with the request.
On October 24, 2008, we
received a letter from the U.S. Department of Justice (“DOJ”) informing us of an
investigation relating to surgical cardiac ablation system devices to treat
atrial fibrillation. We are cooperating with the investigation.
On
November 7, 2008, Guidant/Boston Scientific received a request from the
Department of Defense, Defense Criminal Investigative Service and the Department
of the Army, Criminal Investigation Command seeking information concerning sales
and marketing interactions with physicians at
Madigan Army Medical Center in Tacoma, Washington. We are
cooperating with the request.
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Other
Proceedings
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. This and similar suits were dismissed in
state and federal courts in Minnesota. 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. On October 5, 2007,
Dr. Bonzel filed a complaint against us in Kassel, Germany, alleging the
1995 license agreement is invalid under German law and seeking monetary
damages. On May 16, 2008, we answered denying the allegations in the
complaint. A hearing has been scheduled for May 8, 2009.
As of
June 2003, Guidant had outstanding fourteen suits alleging product liability
related causes of action relating to the ANCURE Endograft System for the
treatment of abdominal aortic aneurysms. Subsequently, Guidant was notified of
additional claims and served with additional complaints relating to the ANCURE
System. From time to time, Guidant has settled certain of the individual claims
and suits for amounts that were not material to Guidant. Recently, Guidant
resolved 8 filed lawsuits pending in the United States District Court for the
District of Minnesota, subject to final dismissal. Guidant also has four cases
pending in State Court in California. These cases have been dismissed on summary
judgment and are pending appeal. Additionally, Guidant has been notified of over
130 potential unfiled claims alleging product liability relating to the ANCURE
System. The claimants generally allege that they or their relatives suffered
injuries, and in certain cases died, as a result of purported defects in the
device or the accompanying warnings and labeling. It is uncertain how many of
these claims will actually be pursued against Guidant.
Although
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 initiated suit against certain
of their insurers, including Allianz, in the Superior Court, State of
Indiana, County of Marion, in order to preserve Guidant’s rights to
coverage. On July 11, 2007, the Illinois court entered a final partial
summary judgment ruling in favor of Allianz. Following appeals, both lawsuits
are pending in the trial courts.
FDA
Warning Letters
In
January 2006, legacy Boston Scientific received a corporate warning letter from
the FDA notifying us of serious regulatory problems at three of our
facilities and advising us that our corporate-wide corrective action plan
relating to three site-specific warning letters issued to us in 2005 was
inadequate. We have identified solutions to the quality system issues cited by
the FDA and have made significant progress in transitioning our organization to
implement those solutions. The FDA reinspected a number of our facilities
and, in October 2008, informed us that our quality system is now in substantial
compliance with its Quality System Regulations. Between September and December
2008, the FDA approved all of our requests for final approval of Class III
submissions previously on hold due to the corporate warning letter and has
approved all eligible requests for Certificates to Foreign Governments (CFGs).
The corporate warning letter remains in place pending final remediation of
certain Medical Device Report (MDR) filing issues, which we are actively working
with the FDA to resolve.
Matters
Concluded Since January 1, 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.
In
131
connection
with an amendment to the Merger Agreement and the execution of related
agreements in August 2007, the parties agreed to a resolution to this litigation
contingent upon the closing of the Amendment and related agreements. On January
3, 2008, the closing contemplated by the amendment and related agreements
occurred and on January 9, 2008, the District Court entered a joint stipulation
vacating the injunction and dismissed the case with prejudice.
On May 4,
2006, we filed suit against Conor Medsystems Ireland Ltd. alleging that its
Costar® paclitaxel-eluting coronary stent system infringes one of our balloon
catheter patents. The suit was filed in Ireland seeking monetary and injunctive
relief. On January 14, 2008, the case was dismissed pursuant to a
settlement agreement between the parties.
On
September 12, 2002, ev3 Inc. filed suit against The Regents of the
University of California and our wholly owned subsidiary, Boston Scientific
International, B.V., in the District Court of The Hague, The Netherlands,
seeking a declaration that ev3’s EDC II and VDS embolic coil products do not
infringe three patents licensed to us from The Regents. On October 30, 2007, we
reached an agreement in principle with ev3 to resolve this matter. On March 27,
2008, the parties signed a definitive settlement agreement and the case has been
formally dismissed.
On
March 29, 2005, we and Boston Scientific Scimed, filed suit against ev3 for
patent infringement, alleging that ev3’s SpideRX® embolic protection device
infringes four U.S. patents owned by us. The complaint was filed in the U.S.
District Court for the District of Minnesota seeking monetary and injunctive
relief. On October 30, 2007, we reached an agreement in principle with ev3 to
resolve this matter. On March 27, 2008, the parties signed a definitive
settlement agreement and the case has been formally dismissed.
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 October 30,
2007, we reached an agreement in principle with ev3 to resolve this matter. On
March 27, 2008, the parties signed a definitive settlement agreement and on
April 4, 2008, a Stipulation of Dismissal was filed with the Court and the case
was formally dismissed.
On
February 20, 2006, Medinol submitted a request for arbitration against us,
and our wholly owned subsidiaries Boston Scientific Ltd. and Boston
Scientific Scimed, Inc., under the Arbitration Rules of the World
Intellectual Property Organization pursuant to a settlement agreement between
Medinol and us dated September 21, 2005. The request for arbitration
alleges that our Liberté® coronary stent system infringes two U.S. patents and
one European patent owned by Medinol. On May 2, 2008, the World Intellectual
Property Organization panel held that the Medinol patents were valid but not
infringed by our Liberté® and TAXUS® Liberté® stent systems. On June 6, 2008,
the parties agreed not to appeal the decision.
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. In
connection with the plea agreement, EVT entered into a five year Corporate
Integrity Agreement (“CIA”) with the Office of the Inspector General of the
United States Department of Health and Human Services. A final annual report was
due on August 30, 2008, and was timely submitted. Subject to review of the final
annual report, the CIA effectively expired on June 30, 2008, in accordance with
its terms.
Shareholder
derivative suits relating to the ANCURE System were 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 sought damages and other
equitable relief. 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. On March 27, 2008, the District Court
granted the motion to dismiss the federal action and entered judgment in favor
of all defendants. On July 11, 2008, the Superior Court granted the parties’
joint motion to dismiss the complaint with prejudice in the final state
derivative action.
132
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 suit was dismissed on September 11, 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 July 31, 2008, the Board of Directors rejected the demand
in the first letter to commence action against the defendants.
In August
2007, we received a warning letter from the FDA regarding the conduct of
clinical investigations associated with our abdominal aortic aneurysm (AAA)
stent-graft program acquired from TriVascular, Inc. We implemented a
comprehensive plan of corrective actions regarding the conduct of our clinical
trials and informed the FDA that we have finalized commitments made as part of
our response. On July 31, 2008, the FDA notified Boston Scientific that no
further actions were required relative to this warning letter. We
terminated the TriVascular AAA development program in 2006.
On
October 15, 2004, Boston Scientific Scimed filed suit against a German
subsidiary of Johnson & Johnson alleging the Cypher® drug-eluting stent
infringes one of our German utility models. The suit was filed in
Mannheim, Germany seeking monetary and injunctive relief. On August 26,
2008, we withdrew the suit.
On
December 30, 2004, Boston Scientific Scimed filed suit against a German
subsidiary of Johnson & Johnson alleging the Cypher® drug-eluting stent
infringes one of our German utility models. The suit was filed in
Dusseldorf, Germany seeking monetary and injunctive relief. On August 26,
2008, we withdrew the suit.
On May 8,
2008, certain shareholders of CryoCor filed a lawsuit in the Superior Court of
the State of California, County of San Diego, against CryoCor, its
directors and us. The lawsuit alleged that the directors of CryoCor breached
their fiduciary duties to their shareholders by approving the sale of the
company to us and that we aided and abetted in the breach of fiduciary duties.
On September 19, 2008, the suit was dismissed by the Court. Plaintiffs have
agreed not to appeal the decision and we have agreed not to seek to recover
costs.
On
January 15, 2008, CryoCor, Inc. (acquired by Boston Scientific Scimed on May 28,
2008) (“CryoCor”) and AMS Research Corporation (“AMS”) filed a statement of
claim in Canada alleging that cryoablation catheters and cryoconsole of CryoCath
Technologies, Inc. (“CryoCath”) infringe certain Canadian patents licensed by
CryoCor. The suit seeks injunctive relief and monetary damages. On September 23,
2008, the parties signed a settlement agreement and on September 25, 2008, the
suit was dismissed.
133
On
January 15, 2008, CryoCor and AMS filed a suit for patent infringement against
CryoCath alleging that Cryocath’s cryosurgical products, including its
cryoconsole and cryoablation catheters, infringe three patents exclusively
licensed to CryoCor. The suit was filed in the U.S. District Court for the
District of Delaware, and seeks monetary damages and injunctive relief. On
February 4, 2008, CryoCath answered the complaint, denying the allegations and
counterclaiming for a declaratory judgment that the patents are invalid and
non-infringed, as well as alleging antitrust violations, deceptive and unfair
business practices and patent infringement by CryoCor of a CryoCath patent. On
September 23, 2008, the parties signed a settlement agreement and on September
25, 2008, the suit was dismissed.
On
September 27, 2004, Target Therapeutics and we filed suit for patent
infringement against Micrus Corporation alleging that certain detachable embolic
coil devices infringe two U.S. patents exclusively licensed to Target
Therapeutics. The complaint was filed in the U.S. District Court for the
Northern District of California seeking monetary and injunctive relief. On
August 6, 2008, we reached an agreement in principle with Micrus to resolve this
matter. On September 4, 2008, the parties signed a definitive settlement
agreement and on October 8, 2008, the case was formally dismissed.
On
February 28, 2008, CryoCor and AMS brought a complaint in the International
Trade Commission alleging that Cryocath’s cryosurgical products, including its
cryoconsole and cryoablation catheters, infringe three patents exclusively
licensed to CryoCor. CryoCor and AMS are seeking an order to exclude entry into
the United States of any of CryoCath’s products found to infringe the patents.
On September 23, 2008, the parties signed a settlement agreement. On
September 25, 2008, the parties filed a joint motion to terminate the action,
which became effective on November 6, 2008.
On
October 15, 2007, CryoCath filed suit for patent infringement against CryoCor
alleging that cryoconsoles and cryoablation catheters sold by CryoCor infringe
certain of CryoCath’s patents. The suit was filed in the U.S. District Court for
the District of Delaware and seeks monetary damages and injunctive relief. On
September 23, 2008, the parties signed a settlement agreement and on September
25, 2008, the suit was dismissed. Two of the patents asserted by CryoCath are
also involved in interference proceedings provoked by CryoCor. The interferences
are on-going at the U.S. Patent and Trademark Office.
On July
2, 2008, Cardio Access LLC filed suit against us alleging infringement of a
patent related to an intra-aortic balloon access cannula owned by them. The suit
was filed in the U.S. District Court for the Eastern District of Texas seeking
monetary and injunctive relief. On November 4, 2008, the case was
dismissed.
Between
March and July 2005, sixty-nine former employees filed charges against Guidant
with the U.S. Equal Employment Opportunity Commission (EEOC) alleging that
Guidant discriminated against the former employees on the basis of their age
when Guidant terminated their employment in the fall of 2004 as part of a
reduction in force. On March 24, 2008, the EEOC began dismissing the charges,
with the final charges dismissed on April 4, 2008, in light of the litigation
pending in Minnesota District Court described in the following
paragraph.
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. Since 2006, we have not received additional
requests for information on this matter.
On
October 23, 2008, we received a letter from Senator Charles E. Grassley, ranking
member of the United States Senate Committee on Finance, requesting certain
information regarding payments made to certain psychiatrists, including those
who may serve as leaders of professional societies or those who may serve as
authorities for developing and modifying the diagnostic criteria for mental
illness. We have cooperated with this request.
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 December 2006 FDA
panel. We provided documents in response to the Committee’s request and there
has been no further action from the Committee.
134
On March
1, 2006, Medtronic Vascular, Inc. filed suit against Boston Scientific Scimed
and us, alleging that our balloon products infringe four U.S. patents owned by
Medtronic Vascular. The suit was filed in the U.S. District Court for the
Eastern District of Texas seeking monetary and injunctive relief. On May 27,
2008, the Court found one of the patents not infringed. On the same date, the
jury found the other three patents valid and infringed, awarding Medtronic $250
million in damages. On July 11, 2008, the Court granted our motion that certain
accused products did not infringe one of the patents and ordered the parties to
submit a new damage calculation. On July 21, 2008, Medtronic and we agreed that
the Court’s ruling reduced the damages by approximately $64 million. On August
29, 2008, the Court found two Medtronic patents unenforceable for inequitable
conduct and set new damages at $19 million. On January 23, 2009, the parties
executed a settlement and stand-still agreement settling the
action.
On August
12, 2008, we filed suit for patent infringement against Medtronic, Inc. and
certain of its subsidiaries alleging that the sale of certain balloon catheters
and stent delivery systems infringe four U.S. patents owned by us. The complaint
was filed in the United States District Court for the Northern District of
California seeking monetary and injunctive relief. On January 23, 2009, the
parties executed a settlement and stand-still agreement and the case was
dismissed on January 29, 2009.
On July
25, 2007, the U.S. District Court for the Northern District of California
granted our motion to intervene in an action filed February 15, 2006 by
Medtronic Vascular and certain of its affiliates against Advanced Cardiovascular
Systems, Inc. and Abbott Laboratories. As a counterclaim plaintiff in this
litigation, we are seeking a declaratory judgment of patent invalidity and of
non-infringement by our PROMUS® coronary stent system relating to two U.S.
patents owned by Medtronic. On January 23, 2009, the parties executed a
settlement and stand-still agreement and the case was dismissed on January 30,
2009.
On August
12, 2008, we and Endovascular Technologies, Inc. filed suit for patent
infringement against Medtronic, Inc. and certain of its subsidiaries alleging
that the sale of Medtronic’s AAA products infringe ten U.S. patents owned by the
us. The complaint was filed in the United States District Court for the Eastern
District of Texas, Tyler Division, seeking monetary and injunctive relief. On
January 23, 2009, the parties executed a settlement and stand-still agreement
and the case was dismissed on February 2, 2009.
On August
13, 2008, Medtronic, Inc. and certain of its subsidiaries filed suit for patent
infringement against us, Boston Scientific Scimed, Inc., Abbott and certain of
Abbott’s subsidiaries alleging infringement of one U.S. patent owned by them.
The complaint was filed in the United States District Court for the Eastern
District of Texas, Marshall Division, seeking monetary and injunctive relief. On
September 2, 2008, Medtronic filed an amended complaint adding a second patent
to the suit. On January 23, 2009, the parties executed a settlement and
stand-still agreement and the case was dismissed on February 2,
2009.
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 U. S. District Court for the Eastern District of Texas seeking
monetary and injunctive relief. On May 10, 2007, SciCo Tec filed an amended
complaint alleging certain additional balloon catheters and stent delivery
systems infringe the same patent. On May 29, 2007, we responded to the amended
complaint and filed a counterclaim seeking declaratory judgment of invalidity
and non-infringement with respect to the patent at issue. On February 7,
2009, the parties settled this suit subject to negotiation of a definitive
settlement agreement.
On April
19, 2007, SciCo Tec GmbH, filed suit against us and our subsidiary, Boston
Scientific Medizintechnik GmbH, alleging certain of our balloon catheters
infringe a German patent owned by SciCo Tec GmbH. The suit was filed in
Mannheim, Germany. We answered the complaint, denying the allegations
and filed a nullity action against SciCo Tec relating to one of its German
patents. On February 7, 2009, the parties settled this suit subject
to negotiation of a definitive settlement agreement.
Litigation-related
Charges
We have
recorded certain significant litigation-related charges as a separate line item
in our accompanying consolidated statements of operations. In 2008, we recorded
a charge of $334 million as a result of a ruling by a federal judge in a patent
infringement case brought against us by Johnson & Johnson. In 2007, we
recorded a charge of $365 million associated with this case.
135
Note M—Stockholders’
Equity
Preferred
Stock
We are
authorized to issue 50 million shares of preferred stock in one or more
series and to fix the powers, designations, preferences and relative
participating, option or other rights thereof, including dividend rights,
conversion rights, voting rights, redemption terms, liquidation preferences and
the number of shares constituting any series, without any further vote or action
by our stockholders. At December 31, 2008 and 2007, we had no shares of
preferred stock issued or outstanding.
Common
Stock
We are
authorized to issue 2.0 billion shares of common stock, $.01 par value per
share. Holders of common stock are entitled to one vote per share. Holders of
common stock are entitled to receive dividends, if and when declared by the
Board of Directors, and to share ratably in our assets legally available for
distribution to our stockholders in the event of liquidation. Holders of common
stock have no preemptive, subscription, redemption, or conversion rights. The
holders of common stock do not have cumulative voting rights. The holders of a
majority of the shares of common stock can elect all of the directors and can
control our management and affairs.
We did
not repurchase any shares of our common stock during 2008, 2007 or 2006.
Approximately 37 million shares remain under previous share repurchase
authorizations. Repurchased shares are available for reissuance under our equity
incentive plans and for general corporate purposes, including acquisitions and
alliances. There were no shares in treasury at December 31, 2008 or
2007.
Note N—Stock
Ownership Plans
Employee
and Director Stock Incentive Plans
On May 6,
2008, our shareholders approved an amendment and restatement of our 2003
Long-Term Incentive Plan (LTIP), increasing the number of shares of our common
stock available for issuance under the plan by 70 million shares. Together with
our 2000 LTIP, the plans provide for the issuance of up to 160 million
shares of common stock. Shares reserved for future equity awards under
our stock incentive plans totaled approximately 82 million at
December 31, 2008. Together,
the Plans cover officers, directors, employees and consultants and provide for
the grant of various incentives, including qualified and nonqualified options,
deferred stock units, stock grants, share appreciation rights, performance-based
awards and market-based awards. The Executive Compensation and Human Resources
Committee of the Board of Directors, consisting of independent, non-employee
directors, may authorize the issuance of common stock and authorize cash awards
under the plans in recognition of the achievement of long-term performance
objectives established by the Committee.
Nonqualified
options issued to employees are generally granted with an exercise price equal
to the market price of our stock on the grant date, vest over a four-year
service period, and have a ten-year contractual life. In the case of qualified
options, if the recipient owns more than ten percent of the voting power of
all classes of stock, the option granted will be at an exercise price of
110 percent of the fair market value of our common stock on the date of
grant and will expire over a period not to exceed five years. Non-vested stock
awards (awards other than options) issued to employees are generally granted
with an exercise price of zero and typically vest in four to five equal
installments over a five-year service period. These awards represent our
commitment to issue shares to recipients after a vesting period. Upon each
vesting date, such awards are no longer subject to risk of forfeiture and we
issue shares of our common stock to the recipient. We generally issue shares for
option exercises and non-vested stock from our treasury, if
available.
During
2004, the FASB issued Statement No. 123(R), Share-Based Payment, which
is a revision of Statement No. 123, Accounting for Stock-Based
Compensation. Statement No. 123(R) supersedes APB Opinion
No. 25, Accounting for
Stock Issued to Employees, and amends Statement No. 95, Statement of Cash Flows. In
general, Statement No. 123(R) contains similar accounting concepts as those
described in Statement No. 123. However, Statement No. 123(R) requires
that we recognize all share-based payments to employees, including grants of
employee stock options, in our consolidated statements of operations based on
their fair values. Pro forma disclosure is no longer an
alternative.
136
The
following presents the impact of stock-based compensation on our consolidated
statements of operations for the years ended December 31, 2008, 2007 and 2006
for options and restricted stock awards:
|
Year
Ended December 31,
|
||||||||||||
|
(in
millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Cost
of products sold
|
$ | 21 | $ | 19 | $ | 15 | ||||||
|
Selling,
general and administrative expenses
|
88 | 76 | 74 | |||||||||
|
Research
and development expenses
|
29 | 27 | 24 | |||||||||
| 138 | 122 | 113 | ||||||||||
|
Income
tax benefit
|
41 | 35 | 32 | |||||||||
| $ | 97 | $ | 87 | $ | 81 | |||||||
|
Net
loss per common share - basic
|
$ | 0.06 | $ | 0.06 | $ | 0.06 | ||||||
|
Net
loss per common share - assuming dilution
|
$ | 0.06 | $ | 0.06 | $ | 0.06 | ||||||
Stock
Options
We
generally use the Black-Scholes option-pricing model to calculate the grant-date
fair value of our stock options granted to employees under our stock incentive
plans. In conjunction with the Guidant acquisition, we converted certain
outstanding Guidant options into approximately 40 million fully vested Boston
Scientific options. See Note D
- Acquisitions for further details regarding the fair value and valuation
assumptions related to those awards. We calculated the fair value for all other
options granted during 2008, 2007 and 2006 using the following estimated
weighted-average assumptions:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Options
granted (in thousands)
|
4,905 | 1,969 | 5,438 | |||||||||
|
Weighted-average
exercise price
|
$ | 12.53 | $ | 15.55 | $ | 21.48 | ||||||
|
Weighted-average
grant-date fair value
|
$ | 4.44 | $ | 6.83 | $ | 7.61 | ||||||
|
Black-Scholes
Assumptions
|
||||||||||||
|
Expected volatility
|
35 | % | 35 | % | 30 | % | ||||||
|
Expected term (in years, weighted)
|
5.0 | 6.3 | 5.0 | |||||||||
|
Risk-free interest rate
|
2.77% - 3.77 | % | 4.05% - 4.96 | % | 4.26% - 5.18 | % | ||||||
Expected
Volatility
For
options granted prior to 2006, we used our historical volatility as a basis to
estimate expected volatility in our valuation of stock options. Upon adoption of
Statement No. 123(R), we changed our method of estimating expected volatility to
consider historical volatility and implied volatility.
Expected
Term
We
estimate the expected term of our options using historical exercise and
forfeiture data. We believe that this historical data is the best estimate of
the expected term of our new option grants. Approximately 75 percent of stock
options granted in 2007 related to a single grant to one member of our executive
management team. We performed a specific analysis for this grant and
determined that the grant had an expected term of 6.7
years. We determined that the other grants during 2007 had
an expected term of 5.0 years based on historical data.
137
Risk-Free Interest
Rate
We use
yield rates on U.S. Treasury securities for a period approximating the expected
term of the award to estimate the risk-free interest rate in our grant-date fair
value assessment.
Expected Dividend
Yield
We have
not historically paid dividends to our shareholders. We currently do not intend
to pay dividends, and intend to retain all of our earnings to repay indebtedness
and invest in the continued growth of our business. Therefore, we have assumed
an expected dividend yield of zero in our grant-date fair value
assessment.
Information
related to stock options for 2008, 2007 and 2006 under stock incentive plans is
as follows:
|
Options
(in
thousands)
|
Weighted
Average Exercise Price
|
Weighted Average Remaining
Contractual Life (in years)
|
Aggregate
Intrinsic Value
(in
millions)
|
|||||||||||||
|
Outstanding
at January 1, 2006
|
50,285 | $ | 20 | |||||||||||||
|
Guidant
converted options
|
39,649 | 13 | ||||||||||||||
|
Granted
|
5,438 | 21 | ||||||||||||||
|
Exercised
|
(10,548 | ) | 11 | |||||||||||||
|
Cancelled/forfeited
|
(1,793 | ) | 25 | |||||||||||||
|
Outstanding
at December 31, 2006
|
83,031 | $ | 18 | |||||||||||||
|
Granted
|
1,969 | 16 | ||||||||||||||
|
Exercised
|
(7,190 | ) | 12 | |||||||||||||
|
Exchanged
for DSUs
|
(6,599 | ) | 33 | |||||||||||||
|
Cancelled/forfeited
|
(2,470 | ) | 24 | |||||||||||||
|
Outstanding
at December 31, 2007
|
68,741 | $ | 17 | |||||||||||||
|
Granted
|
4,905 | 13 | ||||||||||||||
|
Exercised
|
(4,546 | ) | 8 | |||||||||||||
|
Cancelled/forfeited
|
(8,034 | ) | 19 | |||||||||||||
|
Outstanding
at December 31, 2008
|
61,066 | $ | 17 | 3.7 | $ | 2 | ||||||||||
|
Exercisable
at December 31, 2008
|
48,994 | $ | 16 | 2.7 | $ | 2 | ||||||||||
|
Expected
to vest as of December 31, 2008
|
55,824 | $ | 17 | 3.3 | $ | 2 | ||||||||||
On May
22, 2007, we extended an offer to our non-director and non-executive employees
to exchange certain outstanding stock options for deferred stock units (DSUs).
Stock options previously granted under our stock plans with an exercise price of
$25 or more per share were exchangeable for a smaller number of DSUs, based on
exchange ratios derived from the exercise prices of the surrendered
options. On June 20, 2007, following the expiration of the offer, our
employees exchanged approximately 6.6 million options for approximately 1.1
million DSUs, which were subject to additional vesting restrictions. We did not
record incremental stock compensation expense as a result of these exchanges
because the fair values of the options exchanged equaled the fair values of the
DSUs issued.
The total
intrinsic value of options exercised in 2008 was $19 million, as compared to $28
million in 2007 and $102 million in 2006.
138
Non-Vested
Stock
We value
restricted stock awards and DSUs based on the closing trading value of our
shares on the date of grant. Information related to non-vested stock
awards during 2008, 2007, and 2006, including those issued in connection
with our stock option exchange program discussed above, is as
follows:
|
Non-Vested
Stock Award Units
(in
thousands)
|
Weighted
Average Grant-Date Fair Value
|
|||||||
|
Balance
at January 1, 2006
|
3,834 | $ | 30 | |||||
|
Granted
|
6,580 | 23 | ||||||
|
Vested(1)
|
(52 | ) | 32 | |||||
|
Forfeited
|
(487 | ) | 28 | |||||
|
Balance
at December 31, 2006
|
9,875 | $ | 26 | |||||
|
Option
exchange grants
|
1,115 | 16 | ||||||
|
Other
grants
|
9,545 | 17 | ||||||
|
Vested
(1)
|
(778 | ) | 29 | |||||
|
Forfeited
|
(1,621 | ) | 22 | |||||
|
Balance
at December 31, 2007
|
18,136 | $ | 20 | |||||
|
Granted
|
13,557 | 12 | ||||||
|
Vested
(1)
|
(3,856 | ) | 21 | |||||
|
Forfeited
|
(3,183 | ) | 18 | |||||
|
Balance
at December 31, 2008
|
24,654 | $ | 16 | |||||
|
(1)
|
The number of restricted stock
units vested includes shares withheld on behalf of employees to satisfy
statutory tax withholding
requirements.
|
The total
vesting date fair value of stock award units that vested during 2008 was
approximately $47 million, as compared to $15 million in 2007 and $1 million in
2006.
CEO
Award
During
the first quarter of 2006, we granted a special market-based award of two
million deferred stock units to our chief executive officer. The attainment of
this award is based on the individual’s continued employment and our stock
reaching certain specified prices as of December 31, 2008 and December 31,
2009. We determined the fair value of the award to be approximately $15
million based on a Monte Carlo simulation, using the following
assumptions:
|
Stock
price on date of grant
|
$ | 24.42 | |||
|
Expected
volatility
|
30 | % | |||
|
Expected
term (in years)
|
3.84 | ||||
|
Risk-free
rate
|
4.64 | % | |||
We have been and will continue to recognize the expense in our consolidated statement of operations through 2009 using an accelerated attribution method.
139
Expense
Attribution
We
generally recognize compensation expense for our stock awards issued subsequent
to the adoption of Statement
No. 123(R) using a straight-line method over the substantive vesting period.
Prior to the adoption of Statement No. 123(R), we allocated the pro forma
compensation expense for stock option awards over the vesting period using an
accelerated attribution method. We continue to amortize compensation expense
related to stock option awards granted prior to the adoption of Statement No.
123(R) using an accelerated attribution method. Prior to the adoption of
Statement No. 123(R), we recognized compensation expense for non-vested stock
awards over the vesting period using a straight-line method. We continue to
amortize compensation expense related to non-vested stock awards granted prior
to the adoption of Statement No. 123(R) using a straight-line method. Most of
our stock awards provide for immediate vesting upon retirement, death or
disability of the participant. We expense stock-based awards over the period
between grant date and retirement eligibility or immediately if the employee is
retirement eligible at the date of grant.
We
recognize stock-based compensation expense for the value of the portion of
awards that are ultimately expected to vest. Statement No. 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. The term
“forfeitures” is distinct from “cancellations” or “expirations” and represents
only the unvested portion of the surrendered option. We have applied, based on
an analysis of our historical forfeitures, an annual forfeiture rate of
eight percent to all unvested stock awards as of December 31, 2008, which
represents the portion that we expect will be forfeited each year over the
vesting period. We will re-evaluate this analysis periodically and adjust the
forfeiture rate as necessary. Ultimately, we will only recognize
expense for those shares that vest.
Unrecognized
Compensation Cost
Under the
provisions of Statement No. 123(R), we expect to recognize the following
future expense for awards outstanding as of December 31, 2008:
|
Unrecognized
Compensation
Cost
(in
millions)(1)
|
Weighted
Average Remaining Vesting Period
(in
years)
|
|||||||
|
Stock
options
|
$ | 24 | ||||||
|
Non-vested
stock awards
|
184 | |||||||
| $ | 208 | 3.1 | ||||||
(1) Amounts presented represent
compensation cost, net of estimated forfeitures.
Employee
Stock Purchase Plans
In 2006,
our stockholders approved and adopted a new global employee stock purchase plan,
which provides for the granting of options to purchase up to 20 million
shares of our common stock to all eligible employees. Under the employee stock
purchase plan, we grant each eligible employee, at the beginning of each
six-month offering period, an option to purchase shares of our common stock
equal to not more than ten percent of the employee’s eligible compensation
or the statutory limit under the U.S. Internal Revenue Code. Such options may be
exercised generally only to the extent of accumulated payroll deductions at the
end of the offering period, at a purchase price equal to 90 percent of the
fair market value of our common stock at the beginning or end of each offering
period, whichever is less. This discount was reduced from 15 percent to ten
percent effective for the offering period beginning July 1, 2007. At
December 31, 2008, there were approximately 13 million shares available for
future issuance under the employee stock purchase plan.
Information
related to shares issued or to be issued in connection with the employee stock
purchase plan based on employee contributions and the range of purchase prices
is as follows:
140
|
(shares
in thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Shares
issued or to be issued
|
3,505 | 3,418 | 2,765 | |||||||||
|
Range
of purchase prices
|
$ | 6.97 - $10.37 | $ | 10.47 - $13.04 | $ | 14.20 - $14.31 | ||||||
We use
the Black-Scholes option-pricing model to calculate the grant-date fair value of
shares issued under the employee stock purchase plan. We recognize expense
related to shares purchased through the employee stock purchase plan ratably
over the offering period. We recognized $7 million in expense associated with
our employee stock purchase plan in 2008, $13 million in 2007 and $12 million in
2006.
In
connection with our acquisition of Guidant, we assumed Guidant’s employee stock
ownership plan (ESOP), which matched employee 401(k) contributions in the form
of stock. As part of the Guidant purchase accounting, we recognized deferred
costs of $86 million for the fair value of the shares that were unallocated on
the date of acquisition. Common stock held by the ESOP was allocated among
participants’ accounts on a periodic basis until these shares were exhausted and
were treated as outstanding in the computation of earnings per share. As of
December 31, 2008, all of the common stock held by the ESOP had been
allocated to employee accounts. Allocated shares of the ESOP were charged to
expense based on the fair value of the common stock on the date of transfer. We
recognized compensation expense of $12 million in 2008, $23 million in 2007 and
$19 million in 2006 related to the plan. Effective June 1, 2008, this plan was
merged into our 401(k) Retirement Savings Plan.
Note O—Weighted-Average
Shares Outstanding
The
following is a reconciliation of weighted-average shares outstanding for basic
and diluted loss per share computations:
|
Year
Ended December 31,
|
||||||||||||
|
(in
millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Weighted-average
shares outstanding - basic
|
1,498.5 | 1,486.9 | 1,273.7 | |||||||||
|
Net
effect of common stock equivalents
|
||||||||||||
|
Weighted-average
shares outstanding - assuming dilution
|
1,498.5 | 1,486.9 | 1,273.7 | |||||||||
Weighted-average
shares outstanding, assuming dilution, excludes the impact of 50.7 million stock
options for 2008, 42.5 million stock options for 2007, and 30.3 million for
2006, due to the exercise prices of these stock options being greater than the
average fair market value of our common stock during the
year.
In
addition, weighted-average shares outstanding, assuming dilution, excludes
common stock equivalents of 5.8 million for 2008, 13.1 million for 2007 and 15.6
million for 2006 due to our net loss position for those years.
Note P—Segment
Reporting
Each of
our reportable segments generates revenues from the sale of medical devices. As
of December 31, 2008, we had three reporting segments based on geographic
regions: the United States; EMEA, consisting of Europe, the Middle East and
Africa; and Inter-Continental. During 2008, we reorganized our international
structure in order to allow for better utilization of infrastructure and
resources. We combined our Middle East and Africa operations, previously
included in our Inter-Continental segment, with Europe to form a new EMEA region
and merged our former Asia Pacific region into our Inter-Continental segment.
Accordingly, we have revised our reportable segments to reflect the way we
currently manage and view our business. The reportable segments represent an
aggregate of all operating divisions within each segment. We measure and
evaluate our reportable segments based on segment income. We exclude from
segment income certain corporate and manufacturing-related expenses, as our
corporate and manufacturing functions do not meet the definition of a segment,
as defined by FASB Statement No. 131, Disclosures about Segments of an
Enterprise
141
and Related Information. In
addition, certain transactions or adjustments that our Chief Operating Decision
Maker considers to be non-recurring and/or non-operational, such as amounts
related to acquisitions, divestitures, litigation, restructuring activities, and
goodwill and intangible asset impairment charges, as well as amortization
expense, are excluded from segment income. Although we exclude these
amounts from segment income, they are included in reported consolidated net
income (loss) and are included in the reconciliation below.
We manage
our international operating segments on a constant currency basis. Sales
generated from reportable segments and divested businesses, as well as operating
results of reportable segments and expenses from manufacturing operations, are
based on internally derived standard currency exchange rates, which may differ
from year to year, and do not include intersegment profits. We have restated the
segment information for 2007 and 2006 net sales and operating results based on
our standard currency exchange rates used for 2008 in order to remove the impact
of currency fluctuations. In addition, we have reclassified previously reported
2007 and 2006 segment results to be consistent with the 2008 presentation.
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. A reconciliation of the totals
reported for the reportable segments to the applicable line items in our
consolidated statements of operations is as follows:
142
|
Year
Ended December 31,
|
||||||||||||
|
(in
millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Net sales
|
||||||||||||
|
United
States
|
$ | 4,487 | $ | 4,522 | $ | 4,415 | ||||||
|
EMEA
|
1,816 | 1,783 | 1,725 | |||||||||
|
Inter-Continental
|
1,474 | 1,503 | 1,375 | |||||||||
|
Net
sales allocated to reportable segments
|
7,777 | 7,808 | 7,515 | |||||||||
|
Sales
generated from divested businesses
|
66 | 555 | 492 | |||||||||
|
Impact
of foreign currency fluctuations
|
207 | (6 | ) | (186 | ) | |||||||
| $ | 8,050 | $ | 8,357 | $ | 7,821 | |||||||
|
Depreciation expense
|
||||||||||||
|
United
States
|
$ | 62 | $ | 39 | $ | 30 | ||||||
|
EMEA
|
24 | 12 | 8 | |||||||||
|
Inter-Continental
|
22 | 17 | 13 | |||||||||
|
Depreciation
expense allocated to reportable segments
|
108 | 68 | 51 | |||||||||
|
Manufacturing
operations
|
148 | 151 | 125 | |||||||||
|
Corporate
expenses and foreign exchange
|
65 | 79 | 75 | |||||||||
| $ | 321 | $ | 298 | $ | 251 | |||||||
|
Loss before income taxes
|
||||||||||||
|
United
States
|
$ | 1,000 | $ | 1,214 | $ | 1,679 | ||||||
|
EMEA
|
865 | 923 | 777 | |||||||||
|
Inter-Continental
|
774 | 796 | 606 | |||||||||
|
Operating
income allocated to reportable segments
|
2,639 | 2,933 | 3,062 | |||||||||
|
Manufacturing
operations
|
(407 | ) | (621 | ) | (577 | ) | ||||||
|
Corporate
expenses and currency exchange
|
(394 | ) | (462 | ) | (376 | ) | ||||||
|
Goodwill
and intangible asset impairment charges and acquisition-,
divestiture-, litigation-, and restructuring-related net
charges
|
(2,800 | ) | (1,244 | ) | (4,584 | ) | ||||||
|
Amortization
expense
|
(543 | ) | (620 | ) | (474 | ) | ||||||
|
Operating
loss
|
(1,505 | ) | (14 | ) | (2,949 | ) | ||||||
|
Other
expense
|
(526 | ) | (555 | ) | (586 | ) | ||||||
| $ | (2,031 | ) | $ | (569 | ) | $ | (3,535 | ) | ||||
|
As
of December 31,
|
||||||||||||
|
Total
assets
|
2008
|
2007
|
|
|||||||||
|
United
States
|
$ | 2,455 | $ | 2,168 | ||||||||
|
EMEA
|
1,643 | 1,551 | ||||||||||
|
Inter-Continental
|
623 | 733 | ||||||||||
|
Total
assets allocated to reportable segments
|
4,721 | 4,452 | ||||||||||
|
Goodwill
and other intangible assets
|
19,665 | 23,067 | ||||||||||
|
All
other corporate and manufacturing operations assets
|
2,753 | 3,678 | ||||||||||
| $ | 27,139 | $ | 31,197 | |||||||||
143
Enterprise-Wide
Information
|
Net
sales
|
||||||||||||
|
Year
Ended December, 31
|
||||||||||||
|
(in
millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Cardiovascular
|
$ | 3,468 | $ | 3,613 | $ | 4,133 | ||||||
|
CRM/
Electrophysiology
|
2,439 | 2,271 | 1,505 | |||||||||
|
Neurovascular
|
455 | 447 | 413 | |||||||||
|
Cardiovascular
group
|
6,362 | 6,331 | 6,051 | |||||||||
|
Endoscopy
|
943 | 866 | 777 | |||||||||
|
Urology
|
431 | 403 | 371 | |||||||||
|
Endosurgery
group
|
1,374 | 1,269 | 1,148 | |||||||||
|
Neuromodulation
|
245 | 204 | 146 | |||||||||
| 7,981 | 7,804 | 7,345 | ||||||||||
|
Divested
businesses
|
69 | 553 | 476 | |||||||||
| $ | 8,050 | $ | 8,357 | $ | 7,821 | |||||||
|
United
States
|
$ | 4,487 | $ | 4,522 | $ | 4,415 | ||||||
|
Japan
|
861 | 797 | 560 | |||||||||
|
Other
foreign countries
|
2,633 | 2,525 | 2,370 | |||||||||
| 7,981 | 7,804 | 7,345 | ||||||||||
|
Divested
businesses
|
69 | 553 | 476 | |||||||||
| $ | 8,050 | $ | 8,357 | $ | 7,821 | |||||||
|
As
of December 31,
|
||||||||||||
|
Long-lived
assets
|
2008
|
2007
|
||||||||||
|
United
States
|
$ | 1,159 | $ | 1,342 | ||||||||
|
Ireland
|
246 | 235 | ||||||||||
|
Other
foreign countries
|
323 | 138 | ||||||||||
|
Property,
plant and equipment, net
|
1,728 | 1,715 | ||||||||||
|
Goodwill
and other intangible assets
|
19,665 | 23,067 | ||||||||||
| $ | 21,393 | $ | 24,782 | |||||||||
Note Q
- New Accounting Standards
Standards
Implemented
Interpretation
No. 48
In July
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, to create a single model to address accounting for
uncertainty in tax positions. We adopted Interpretation No. 48 as of the first
quarter of 2007. Interpretation No. 48 requires the use of a two-step approach
for recognizing and measuring tax benefits taken or expected to be taken in a
tax return, as well as enhanced disclosures regarding uncertainties in income
tax positions, including a roll forward of tax benefits taken that do not
qualify for financial statement recognition. Refer to Note K – Income Taxes to our
2008 consolidated financial statements included in Item 8 of this Annual Report
for more information regarding our application of Interpretation No. 48 and its
impact on our consolidated financial statements.
144
Statement
No. 157
In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements.
Statement No. 157 defines fair value, establishes a framework for measuring fair
value in accordance with U.S. GAAP, and expands disclosures about fair value
measurements. Statement No. 157 does not require any new fair value
measurements; rather, it applies to other accounting pronouncements that require
or permit fair value measurements. We adopted the provisions of Statement No.
157 for financial assets and financial liabilities as of January 1, 2008, and
will apply those provisions to nonfinancial assets and nonfinancial liabilities
as of January 1, 2009. Refer to Note C – Fair Value Measurements
to our consolidated financial statements contained in Item 8 of this
Annual Report for a discussion of our adoption of Statement No. 157 and its
impact on our financial statements.
Statement
No. 158
In
September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, which amends Statements
Nos. 87, 88, 106 and 132(R). Statement No. 158 requires recognition of the
funded status of a benefit plan in the consolidated statements of financial
position, as well as the recognition of certain gains and losses that arise
during the period, but are deferred under pension accounting rules, in other
comprehensive income (loss). Additionally, Statement No. 158 requires that,
beginning with fiscal years ending after December 15, 2008, a business entity
measure plan assets and benefit obligations as of its fiscal year-end statement
of financial position. We adopted the measurement-date requirement in 2008 and
the other provisions of Statement No. 158 in 2006. Refer to Note A – Significant Accounting
Policies to our 2008 consolidated financial statements included in Item 8
of this Annual Report for more information on our pension and other
postretirement plans.
Statement
No. 159
In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, which allows an entity to elect to
record financial assets and financial liabilities at fair value upon their
initial recognition on a contract-by-contract basis. We adopted Statement No.
159 as of January 1, 2008 and did not elect the fair value option for our
eligible financial assets and financial liabilities.
New Standards to be
Implemented
Statement
No. 161
In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities, which amends Statement No. 133 by
requiring expanded disclosures about an entity’s derivative instruments and
hedging activities. Statement No. 161 requires increased qualitative,
quantitative, and credit-risk disclosures, including (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under Statement No. 133 and its related interpretations,
and (c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. We are
required to adopt Statement No. 161 for our first quarter ending March 31,
2009.
Staff
Position No. 157-2
In
February 2008, the FASB released Staff Position No. 157-2, Effective Date of FASB Statement
No. 157, which delays the effective date of Statement No. 157
for all nonfinancial assets and nonfinancial liabilities, except for those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis. We are required to apply the provisions of Statement No. 157 to
nonfinancial assets and nonfinancial liabilities as of January 1, 2009. We do
not believe the adoption of Staff Position No. 157-2 will have a material impact
on our future results of operations or financial position.
145
Statement
No. 141(R)
In
December 2007, the FASB issued Statement No. 141(R), Business Combinations, a
replacement for Statement No. 141. Statement No. 141(R) retains the fundamental
requirements of Statement No. 141, but requires the recognition of all assets
acquired and liabilities assumed in a business combination at their fair values
as of the acquisition date. It also requires the recognition of assets acquired
and liabilities assumed arising from contractual contingencies at their
acquisition date fair values. Additionally, Statement No. 141(R) supersedes FASB
Interpretation No. 4, Applicability of FASB Statement No.
2 to Business Combinations Accounted for by the Purchase Method, which
required research and development assets acquired in a business combination that
had no alternative future use to be measured at their fair values and expensed
at the acquisition date. Statement No. 141(R) now requires that purchased
research and development be recognized as an intangible asset. We are required
to adopt Statement No. 141(R) prospectively for any acquisitions on or after
January 1, 2009, except for changes in tax assets and liabilities associated
with prior acquisitions.
146
QUARTERLY
RESULTS OF OPERATIONS
(in
millions, except per share data)
(unaudited)
|
Three
Months Ended
|
||||||||||||||||
|
March
31,
|
June
30,
|
Sept
30,
|
Dec
31,
|
|||||||||||||
|
2008
|
||||||||||||||||
|
Net
sales
|
$ | 2,046 | $ | 2,024 | $ | 1,978 | $ | 2,002 | ||||||||
|
Gross
profit
|
1,466 | 1,420 | 1,323 | 1,372 | ||||||||||||
|
Operating
income (loss)
|
580 | 303 | 28 | (2,416 | ) | |||||||||||
|
Net
income (loss)
|
322 | 98 | (62 | ) | (2,394 | ) | ||||||||||
|
Net
income (loss) per common share - basic
|
$ | 0.22 | $ | 0.07 | $ | (0.04 | ) | $ | (1.59 | ) | ||||||
|
Net
income (loss) per common share - assuming dilution
|
$ | 0.21 | $ | 0.07 | $ | (0.04 | ) | $ | (1.59 | ) | ||||||
|
2007
|
||||||||||||||||
|
Net
sales
|
$ | 2,086 | $ | 2,071 | $ | 2,048 | $ | 2,152 | ||||||||
|
Gross
profit
|
1,518 | 1,508 | 1,473 | 1,517 | ||||||||||||
|
Operating
income (loss)
|
282 | 280 | (147 | ) | (430 | ) | ||||||||||
|
Net
income (loss)
|
120 | 115 | (272 | ) | (458 | ) | ||||||||||
|
Net
income (loss) per common share - basic
|
$ | 0.08 | $ | 0.08 | $ | (0.18 | ) | $ | (0.31 | ) | ||||||
|
Net
income (loss) per common share - assuming dilution
|
$ | 0.08 | $ | 0.08 | $ | (0.18 | ) | $ | (0.31 | ) | ||||||
Our
reported results for 2008 included goodwill and intangible asset impairment
charges; acquisition-, divestiture-, litigation- and restructuring-related
amounts and discrete tax items (after tax) of: $74 million of net credits in the
first quarter, $98 million of net charges in the second quarter,
$202 million of net charges in the third quarter and $2.570 billion of net
charges in the fourth quarter. These charges consisted of: goodwill and
intangible asset impairment charges, associated primarily with a write-down of
goodwill; a gain related to the receipt of an acquisition-related milestone
payment from Abbott Laboratories; purchased research and development charges,
attributable primarily with the acquisitions of Labcoat, Ltd. and CryoCor, Inc.;
restructuring charges associated with our on-going expense and head count
reduction initiatives; a gain associated with the sale of certain non-strategic
businesses; losses associated with the sale of certain non-strategic
investments; litigation-related charges resulting primarily from a ruling by a
federal judge in a patent infringement case brought against us by Johnson &
Johnson; and discrete tax benefits related to certain tax positions associated
with prior period acquisition-, divestiture-, litigation- and
restructuring-related charges.
During
2007, we recorded intangible asset impairments and acquisition-, divestiture-,
litigation- and restructuring-related charges (after tax) of: $20 million of net
charges in the first quarter, $1 million of net charges in the second
quarter, $435 million of net charges in the third quarter and $654 million
of net charges in the fourth quarter. These charges consisted of: intangible
asset impairments associated with our decision to suspend further significant
funding of the Petal™ bifurcation project acquired with Advanced Stent
Technologies; a charge attributable to estimated losses associated with
litigation; restructuring charges associated with our expense and head count
reduction initiatives; losses associated with the write-down of assets held for
sale attributable to the sale of certain of our businesses; charges for
purchased research and development costs related to certain acquisitions and
strategic alliances; and Guidant integration costs.
147
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTINGAND FINANCIAL DISCLOSURE
None.
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 December 31, 2008 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 December 31, 2008,
our disclosure controls and procedures were effective.
Management’s
Report on Internal Control over Financial Reporting
Management’s
report on our internal control over financial reporting is contained in Item
7.
Report
of Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting
The
report of Ernst & Young LLP on our internal control over financial
reporting is contained in Item 7.
Changes
in Internal Control over Financial Reporting
During
the quarter ended December 31, 2008, 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.
ITEM 9B.
OTHER
INFORMATION.
None.
148
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Our
directors and executive officers as of January 1, 2009, were as
follows:
|
DIRECTORS
|
||
|
John
E. Abele
|
72
|
Director;
Founder
|
|
Ursula
M. Burns
|
50
|
Director;
President, Xerox Corporation
|
|
Nancy-Ann
DeParle
|
52
|
Director;
Managing Director, CCMP Capital Advisors, LLC
|
|
J.
Raymond Elliott
|
59
|
Director;
Retired Chairman, President and Chief Executive Officer of Zimmer
Holdings, Inc.
|
|
Joel
L. Fleishman
|
74
|
Director;
Professor of Law and Public Policy,
Duke University
|
|
Marye
Anne Fox, Ph.D.
|
61
|
Director;
Chancellor of the University of California, San
Diego
|
|
Ray
J. Groves
|
73
|
Director;
Retired Chairman and Chief Executive Officer, Ernst &
Young
|
|
Kristina
M. Johnson, Ph.D.
|
51
|
Director;
Provost and Senior Vice President of Academic Affairs, The
Johns Hopkins University
|
|
Ernest
Mario, Ph.D.
|
70
|
Director;
Chairman and Chief Executive Officer, Capnia, Inc.
|
|
N.J.
Nicholas, Jr.
|
69
|
Director;
Private Investor
|
|
Pete
M. Nicholas
|
67
|
Director;
Founder, Chairman of the Board
|
|
John
E. Pepper
|
70
|
Director;
Co-Chair,
National Underground Railroad Freedom Center
|
|
Uwe
E. Reinhardt, Ph.D.
|
71
|
Director;
Professor of Political Economy and Economics and Public Affairs,
Princeton University
|
|
Senator
Warren B. Rudman
|
78
|
Director;
Former U.S. Senator, Co-Chairman, Stonebridge International, LLC and Of
Counsel, Paul, Weiss, Rifkind, Wharton, & Garrison
LLP
|
|
James
R. Tobin
|
64
|
President
and Chief Executive Officer and Director
|
|
EXECUTIVE
OFFICERS
|
||
|
Donald
Baim, M.D.
|
59
|
Executive
Vice President, Chief Medical and Scientific Officer
|
|
Brian
R. Burns
|
44
|
Senior
Vice President, Quality
|
|
Jeffrey
D. Capello
|
44
|
Senior
Vice President, Chief Group Accounting Officer and Corporate
Controller
|
|
Fredericus
A. Colen
|
56
|
Executive
Vice President and Group President, Cardiac Rhythm Management
(CRM)
|
|
Paul
Donovan
|
53
|
Senior
Vice President, Corporate Communications
|
|
Jim
Gilbert
|
51
|
Executive
Vice President, Strategy and Business Development
|
|
William Kucheman
|
59
|
Senior
Vice President and Group President, Cardiovascular
|
|
Sam
R. Leno
|
63
|
Executive
Vice President, Finance and Information Systems and Chief Financial
Officer
|
|
William
McConnell, Jr.
|
59
|
Senior
Vice President, Sales, Marketing and Business Strategies,
CRM
|
|
David
McFaul
|
52
|
Senior
Vice President, International
|
|
Stephen Moreci
|
57
|
Senior
Vice President and Group President, Endosurgery
|
|
Michael
Onuscheck
|
42
|
Senior
Vice President and President, Neuromodulation
|
|
Timothy
A. Pratt
|
59
|
Executive
Vice President, Secretary and General Counsel
|
|
Kenneth
J. Pucel
|
42
|
Executive
Vice President, Operations
|
|
Lucia
L. Quinn
|
55
|
Executive
Vice President, Human Resources
|
John
Abele, our co-founder, has been a director of Boston Scientific since 1979. Mr.
Abele was our Treasurer from 1979 to 1992, our Co-Chairman from 1979 to 1995 and
our Vice Chairman and Founder, Office of the Chairman from February 1995 to
March 1996. Mr. Abele is also the owner of The Kingbridge Centre and Institute,
a 120-room conference center in Ontario that provides special services and
research to businesses, academia and government. He was President of Medi-tech,
Inc. from 1970 to 1983, and prior to that served in sales, technical and general
management positions for Advanced Instruments, Inc. Mr. Abele is the Chairman of
the Board of the F.I.R.S.T. (For Inspiration and Recognition of Science and
Technology) Foundation and is also a member of numerous not-for-profit boards.
He is a member of the President’s Council of Olin College and Trustee Emeritas
of Amherst College. Mr. Abele received a B.A. degree from Amherst
College.
Ursula
Burns has been a Director of Boston Scientific since 2002. Ms. Burns is
President of Xerox Corporation. Ms. Burns joined Xerox in 1980, subsequently
advancing through several engineering and management positions. Ms. Burns served
as Vice President and General Manager, Departmental Business Unit from 1997 to
1999, Senior Vice President, Worldwide Manufacturing and Supply Chain Services
from 1999 to 2000, Senior Vice President, Corporate Strategic Services from 2000
to 2001, President of Document Systems and Solutions Group from 2001 to 2003 and
President of Business Group Operations and Corporate Senior Vice President until
her most recent appointment in April 2007. She serves on the boards of directors
of Xerox Corporation and American Express Corporation, as well as the F.I.R.S.T.
(For Inspiration and Recognition of Science and Technology) Foundation, CASA
National Center on Addiction and Substance Abuse at Columbia University and the
National Academy Foundation. She is also a Trustee of The MIT Corporation and
the University of
149
Rochester and is also a member of the board of directors of the U.S.
Olympic Committee. Ms. Burns earned a B.S. degree from Polytechnic Institute of
New York and an M.S. degree in mechanical engineering from Columbia
University.
Nancy-Ann
DeParle has been a Director of Boston Scientific since April 2006. Ms. DeParle
is a Managing Director of CCMP Capital Advisors, LLC and a Senior Fellow at The
Wharton School of the University of Pennsylvania. She had been a Senior Advisor
for JPMorgan Partners from 2001 to 2006. Previously, she served as the
Administrator of the Health Care Financing Administration (HCFA) (now the
Centers for Medicare and Medicaid Services) from 1997 to 2000 and a fellow at
the Institute of Politics at Harvard University from 2000 to 2001. Prior to her
role at HCFA, Ms. DeParle was the Associate Director for Health and Personnel at
the White House Office of Management and Budget from 1993 to 1997 and served as
commissioner of the Tennessee Department of Human Services from 1987 to 1989.
She also has worked as a lawyer in private practice in Nashville, Tennessee and
Washington, D.C. Ms. DeParle is a director of Medco Health Solutions, Inc.; and
Cerner Corporation, as well as CareMore Holdings, LLC, Novel Environment Power,
and Legacy Hospital Partners, all private companies owned or managed by CCMP
Capital Advisors. She is also a trustee of the Robert Wood Johnson Foundation
and serves on the editorial board of Health Affairs. From 2002-2008, she served
on the Medicare Payment Advisory Commission (MedPAC), which advises Congress on
Medicare payment policy. Ms. DeParle received a B.A. degree from the University
of Tennessee, a J.D. from Harvard Law School, and B.A. and M.A. degrees in
Politics and Economics from Balliol College of Oxford University, where she was
a Rhodes Scholar.
J.
Raymond Elliott has been a Director of Boston Scientific in September 2007. Mr.
Elliott was the Chairman of Zimmer Holdings, Inc. until November 2007 and was
Chairman, President and Chief Executive Officer of Zimmer Holdings, Inc. from
March 2001 to May 2007. Mr. Elliott was appointed President of Zimmer, Inc. in
November 1997. Mr. Elliott has more than 35 years of experience in orthopedics,
medical devices and consumer products. He has served as a director on more than
20 business-related boards in the U.S., Canada, Japan and Europe and has served
on six occasions as Chairman. He has served as a member of the board of
directors and chair of the orthopedic sector of the Advanced Medical Technology
Association (AdvaMed) and was a director of the Indiana Chamber of Commerce, the
American Swiss Foundation and Bausch & Lomb Corporation. Mr. Elliott has
served as the Indiana representative on the President’s State Scholars
Program and as a trustee of the Orthopaedic Research and Education Foundation
(OREF). He holds a bachelor’s degree from the University of Western Ontario,
Canada.
Joel
Fleishman has been a Director of Boston Scientific since 1992. He is also
Professor of Law and Public Policy at Duke University where he has served in
various administrative positions, including First Senior Vice President, since
1971. Mr. Fleishman is a founding member of the governing board of the Duke
Center for Health Policy Research and Education and was the founding director
from 1971 to 1983 of Duke University’s Terry Sanford Institute of Public Policy.
He is the director of the Samuel and Ronnie Heyman Center for Ethics, Public
Policy and the Professions and the director of the Duke University Philanthropic
Research Program. From 1993 to 2001, Mr. Fleishman took a part time leave from
Duke University to serve as President of the Atlantic Philanthropic Service
Company, the U.S. program staff of Atlantic Philanthropies. Mr. Fleishman also
serves as a member of the Board of Trustees of The Center for Effective
Philanthropy and the Partnership for Public Service, Chairman of the Board of
Trustees of the Urban Institute, Chairman of The Visiting Committee of the
Kennedy School of Government, Harvard University, as well as several other
charitable and not-for-profit organizations. He is also a director of Polo Ralph
Lauren Corporation. Mr. Fleishman received A.B., M.A. and J.D. degrees from the
University of North Carolina at Chapel Hill, and an LL.M. degree from Yale
University.
Marye
Anne Fox has been a Director of Boston Scientific since 2001. Dr. Fox has been
Chancellor of the University of California, San Diego and Distinguished
Professor of Chemistry since August 2004. Prior to that, she served as
Chancellor of North Carolina State University and Distinguished University
Professor of Chemistry from 1998 to 2004. From 1976 to 1998, she was a member of
the faculty at the University of Texas, where she taught chemistry and held the
Waggoner Regents Chair in Chemistry from 1991 to 1998. She served as the
University’s Vice President for Research from 1994 to 1998. Dr. Fox has served
as the Co-Chair of the National Academy of Sciences’
Government-University-Industry Research Roundtable as the Vice Chair of the
National Science Board, and served on President Bush’s Council of Advisors on
Science and Technology. She has served as the Vice Chair of the National Science
Board. She also serves on the boards of a number of other scientific,
technological and civic
150
organizations, and is a member of the boards of directors of Red Hat Corp.,
W.R. Grace Co. and the Camille and Henry Dreyfus Foundation. She has been
honored by a wide range of educational and professional organizations, and she
has authored more than 350 publications, including five books. Dr. Fox holds a
B.S. in Chemistry from Notre Dame College, an M.S. in Organic Chemistry from
Cleveland State University, and a Ph.D. in Organic Chemistry from Dartmouth
College.
Ray
Groves has been a Director of Boston Scientific since 1999. Effective February
16, 2009, Mr. Groves became the Ombudsman for Standard & Poor’s. From 2001
to 2005, Mr. Groves served in various roles at Marsh Inc., including President,
Chairman and Senior Advisor, and is a former member of the board of directors of
its parent company, Marsh & McLennan Companies, Inc. He served as Chairman
of Legg Mason Merchant Banking, Inc. from 1995 to 2001. Mr. Groves served as
Chairman and Chief Executive Officer of Ernst & Young for 17 years until his
retirement in 1994. Mr. Groves currently serves as a member of the boards of
directors of the Colorado Physicians Insurance Company, and Group Ark Insurance
Holdings, Ltd. Mr. Groves is a member of the Council on Foreign Relations. He is
a former member of the Board of Governors of the American Stock Exchange and the
National Association of Securities Dealers. Mr. Groves is former Chairman of the
board of directors of the American Institute of Certified Public Accountants. He
is a director of Nursing and Home Care, Inc., a member and former Chair of the
board of directors of The Ohio State University Foundation and a member of the
Dean’s Advisory Council of the Fisher College of Business. He is a former member
of the Board of Overseers of The Wharton School of the University of
Pennsylvania and served as the Chairman of its Center for the Study of the
Service Sector. Mr. Groves is an advisory director of the Metropolitan Opera
Association and a director of the Collegiate Chorale. Mr. Groves received a B.S.
degree from The Ohio State University.
Kristina
Johnson has been a Director since April 2006. Dr. Johnson is Provost and Senior
Vice President of Academic Affairs at The Johns Hopkins University. Until
September 2007, she was Dean of the Pratt School of Engineering at Duke
University, a position she had held since July 1999. Previously she served as a
professor in the Electrical and Computer Engineering Department, University of
Colorado and as director of the National Science Foundation Engineering Research
Center for Optoelectronics Computing Systems at the University of Colorado,
Boulder. Dr. Johnson is a co-founder of the Colorado Advanced Technology
Institute Center of Excellence in Optoelectronics and serves as a director of
Minerals Technologies, Inc., AES Corporation and Nortel Corporation. Dr. Johnson
is also Chair of the Board of Directors of Jhpiego, an international non-profit
health organization affiliated with Johns Hopkins University, SparkIP and Center
Stage, the Baltimore Theatre. Dr. Johnson was a Fulbright Faculty Scholar in the
Department of Electrical Engineering at the University of Edinburgh, Scotland
and a NATO Post-Doctoral Fellow at Trinity College, Dublin, Ireland. Dr. Johnson
received B.S., M.S. and Ph.D. degrees in electrical engineering from Stanford
University.
Ernest
Mario has been a Director of Boston Scientific since 2001 and is currently the
Chairman and Chief Executive Officer of Capnia, Inc. From 2003 to July 2007, Dr.
Mario was Chairman of Reliant Pharmaceuticals. From 2003 to 2006, he was also
the chief executive officer of Reliant Pharmaceuticals. Prior to joining Reliant
Pharmaceuticals in April 2003, he was the Chairman of IntraBiotics
Pharmaceuticals, Inc. from April 2002 to April 2003. Dr. Mario also served as
Chairman and Chief Executive Officer of Apothogen, Inc., a pharmaceutical
company, from January 2002 to April 2002 when Apothogen was acquired by
IntraBiotics. Dr. Mario served as the Chief Executive of Glaxo Holdings plc from
1989 until March 1993 and as Deputy Chairman and Chief Executive from January
1992 until March 1993. From 1993 to 1997, Dr. Mario served as Co-Chairman and
Chief Executive Officer of ALZA Corporation, a research based pharmaceutical
company with leading drug delivery technologies, and Chairman and Chief
Executive Officer from 1997 to 2001. Dr. Mario presently serves on the boards of
directors of Maxygen, Inc., Pharmaceutical Product Development, Inc., Avid
Radiopharmaceuticals, Inc. and Celgene Corporation. He was a Trustee of Duke
University from 1988 to June 2007 and in July 2007 he retired as Chairman of the
Board of the Duke University Health System which he chaired from its inception
in 1996. He is a past Chairman of the American Foundation for Pharmaceutical
Education and serves as an advisor to the pharmacy schools at the University of
Maryland, the University of Rhode Island and The Ernest Mario School of Pharmacy
at Rutgers University. Dr. Mario holds a B.S. in Pharmacy from Rutgers, and an
M.S. and a Ph.D. in Physical Sciences from the University of Rhode
Island.
151
N.J.
Nicholas, Jr. has been a Director of Boston Scientific since 1994 and is a
private investor. Previously, he served as President of Time, Inc. from
September 1986 to May 1990 and Co-Chief Executive Officer of Time Warner, Inc.
from May 1990 until February 1992. Mr. Nicholas is a director of Xerox
Corporation and Time Warner Cable, Inc. He has served as a member of the
President’s Advisory Committee for Trade Policy and Negotiations and the
President’s Commission on Environmental Quality. Mr. Nicholas is Chairman of the
Board of Trustees of the Environmental Defense Fund and a member of the Council
of Foreign Relations. Mr. Nicholas received an A.B. degree from Princeton
University and an M.B.A. degree from Harvard Business School. He is the brother
of Pete M. Nicholas, Chairman of the Board.
Pete
Nicholas, our co-founder, has been Chairman of the Board since 1995. He has been
a Director since 1979 and served as our Chief Executive Officer from 1979 to
March 1999 and Co-Chairman of the Board from 1979 to 1995. Prior to joining
Boston Scientific, he was corporate director of marketing and general manager of
the Medical Products Division at Millipore Corporation, a medical device
company, and served in various sales, marketing and general management positions
at Eli Lilly and Company. He is currently Chairman Emeritus of the Board of
Trustees of Duke University. Mr. Nicholas is also a Fellow of the American
Academy of Arts and Sciences and Vice Chairman of the Trust for that
organization. He also serves on several for profit and not for profit boards
including CEOs for Fundamental Change in Education and the Boys and Girls Club
of Boston. After college, Mr. Nicholas served as an officer in the U.S. Navy,
resigning his commission as lieutenant in 1966. Mr. Nicholas received a B.A.
degree from Duke University, and an M.B.A. degree from The Wharton School of the
University of Pennsylvania. He is the brother of N.J. Nicholas, Jr., one of our
directors.
John
Pepper has been a Director of Boston Scientific since 2003 and he previously
served as a director of Boston Scientific from November 1999 to May 2001. Mr.
Pepper is Chairman of the Board of Directors of the Walt Disney Company since
January 2007. He is also a Co-Chair of the Board of Directors of the National
Underground Railroad Freedom Center and served as its Chief Executive Officer
until May 2007. Previously he served as Vice President for Finance and
Administration of Yale University from January 2004 to December 2005. Prior to
that, he served as Chairman of the Executive Committee of the Board of Directors
of The Procter & Gamble Company until December 2003. Since 1963, he has
served in various positions at Procter & Gamble, including Chairman of the
Board from 2000 to 2002, Chief Executive Officer and Chairman from 1995 to 1999,
President from 1986 to 1995 and director since 1984. He is a member of the
Executive Committee of the Cincinnati Youth Collaborative. Mr. Pepper graduated
from Yale University in 1960 and holds honorary doctoral degrees from Yale
University, The Ohio State University, Xavier University, University of
Cincinnati, Mount St. Joseph College and St. Petersburg University
(Russia).
Uwe
Reinhardt has been a Director of Boston Scientific since 2002. Dr. Reinhardt is
the James Madison Professor of Political Economy and Professor of Economics and
Public Affairs at Princeton University, where he has taught since 1968. Dr.
Reinhardt is a senior associate of the University of Cambridge, England and
serves as a Trustee of the Duke University Health System, H&Q Healthcare
Investors, H&Q Life Sciences Investors and Hambrecht & Quist Capital
Management LLC. He is also the Commissioner of the Kaiser Family Foundation
Commission on Medicaid and the Uninsured and a member of the boards of directors
of Amerigroup Corporation and Legacy Hospital Partners, Inc. Dr. Reinhardt
received a Bachelor of Commerce degree from the University of Saskatchewan,
Canada and a Ph.D. in economics from Yale University.
Senator
Warren Rudman has been a Director of Boston Scientific since 1999. Senator
Rudman is Co-Chairman of Stonebridge International, LLC and has been Of Counsel
to the international law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP
since January 2003. Previously, he was a partner of the firm since 1992. Prior
to joining the firm, he served two terms as a U.S. Senator from New Hampshire
from 1980 to 1992. He serves on the boards of directors of several funds managed
by the Dreyfus Corporation. Senator Rudman is Vice Chairman of the International
Advisory Board of D.B. Zwirn + Co. and a member of the External Advisory Council
of BP America Inc. He is the founding co-chairman of the Concord Coalition.
Senator Rudman received a B.S. from Syracuse University and an LL.B. from Boston
College Law School and served in the U.S. Army during the Korean
War.
152
James R.
Tobin is our President and Chief Executive Officer and also serves as a
Director. Prior to joining Boston Scientific in March 1999, Mr. Tobin served as
President and Chief Executive Officer of Biogen, Inc. from 1997 to 1998 and
Chief Operating Officer of Biogen from 1994 to 1997. From 1972 to 1994, Mr.
Tobin served in a variety of executive positions with Baxter International,
including President and Chief Operating Officer from 1992 to 1994. Previously,
he served at Baxter as Managing Director in Japan, Managing Director in Spain,
President of Baxter’s I.V. Systems Group and Executive Vice President. Mr. Tobin
currently serves on the boards of directors of Curis, Inc. and Applera
Corporation. Mr. Tobin holds an A.B. from Harvard College and an M.B.A. from
Harvard Business School. Mr. Tobin also served in the U.S. Navy from 1968 to
1972 where he achieved the rank of lieutenant.
Donald
Baim, M.D. joined Boston Scientific in July 2006 and is our Executive Vice
President, Chief Medical and Scientific Officer. Prior to joining Boston
Scientific, Dr. Baim was a Professor of Medicine at Harvard Medical School, and
Senior Physician at the Brigham and Women’s Hospital. He has served as a member
of the Interventional Cardiology Test Committee of the American Board of
Internal Medicine (ABIM). In 1981, Dr. Baim joined Boston’s Beth Israel Hospital
to establish an interventional cardiology program. In 2000, he joined the
Brigham and Women’s Hospital in Boston, where, in addition to his clinical
responsibilities, he directed the hospital’s participation in the Center for the
Integration of Medicine and Innovative Technology (CIMIT). Since 2005, Dr. Baim
has also served as Chief Academic Officer of the Harvard Clinical Research
Institute (HCRI), a not-for-profit organization that designs, conducts, and
analyzes pilot and pivotal trials of new medical devices to support their
approval by the FDA. Dr. Baim completed his undergraduate training in Physics at
the University of Chicago, and then received an M.D. from the Yale University
School of Medicine.
Brian
Burns has been our Senior Vice President of Quality since December 2004.
Previously, Mr. Burns was our Vice President of Global Quality Assurance from
January 2003 to December 2004, our Vice President of Cardiology Quality
Assurance from January 2002 to January 2003 and our Director of Quality
Assurance from April 2000 to January 2002. Prior to joining Boston Scientific,
Mr. Burns held various positions with Cardinal Healthcare, Allegiance Healthcare
and Baxter Healthcare. Mr. Burns received his B.S. degree in chemical
engineering from the University of Arkansas.
Jeffrey
D. Capello joined Boston Scientific in June 2008 as our Senior Vice President
and Chief Accounting Officer, and became a member of the Executive Committee on
January 1, 2009. He is currently responsible for overseeing the
Global Controllership, Treasury, and Information Technology organizations. Prior
to joining us, he was the Senior Vice President and Chief Financial Officer with
responsibilities for Business Development at PerkinElmer, Inc. Prior
to January 2006, he was the Vice President of Finance, Corporate Controller and
Treasurer of PerkinElmer, Inc. and was named Chief Accounting Officer of Perkin
Elmer in April 2002. From 1991 to June 2001, he held various
positions including that of partner from 1997 to 2001 at PriceWaterhouseCoopers
LLP, a public accounting firm initially in the United States and later in the
Netherlands. During 2008, Mr. Capello served on the Board of Directors of
Sirtris Pharmaceuticals, Inc. and served as a member of its Audit Committee. He
holds a Bachelor of Science degree in business administration from the
University of Vermont and a Master of Business Administration degree from the
Harvard Business School and is also a certified public accountant.
Fredericus
A. Colen is our Executive Vice President and Group President, Cardiac Rhythm
Management (CRM). Previously, he was our Executive Vice President, Operations
and Technology for CRM. Mr. Colen joined Boston Scientific in 1999 as Vice
President of Research and Development of Scimed and, in February 2001, he was
promoted to Senior Vice President, Cardiovascular Technology of Scimed. Before
joining Boston Scientific, he worked for several medical device companies,
including Guidant Corporation, where he launched the Delta TDDD Pacemaker
platform, and St. Jude Medical, where he served as Managing Director for the
European subsidiary of the Cardiac Rhythm Management Division and as Executive
Vice President, responsible for worldwide R&D for implantable pacemaker
systems. He was the Vice President of the International Association of
Prosthesis Manufacturers (IAPM) in Brussels from 1995 to 1997. Mr. Colen was
educated in The Netherlands and Germany and holds the U.S. equivalent of a
Master’s Degree in Electrical Engineering with a focus on medical technology
from the Technical University in Aachen, Germany.
153
Paul
Donovan joined Boston Scientific in March 2000 and is our Senior Vice President,
Corporate Communications. Prior to joining Boston Scientific, Mr. Donovan was
the Executive Director of External Affairs at Georgetown University Medical
Center, where he directed media, government and community relations as well as
employee communications from 1998 to 2000. From 1997 to 1998, Mr. Donovan was
Chief of Staff at the United States Department of Commerce. From 1993 to 1997,
Mr. Donovan served as Chief of Staff to Senator Edward M. Kennedy and from 1989
to 1993 as Press Secretary to Senator Kennedy. Mr. Donovan is a director of the
Massachusetts High Technology Council, and the Massachusetts Medical Device
Industry Council. Mr. Donovan received a B.A. degree from Dartmouth
College.
James
Gilbert is our Executive Vice President, Strategy and Business Development.
Formerly, he was our Group President, Cardiovascular and was responsible for our
Cardiovascular Group, which included the Peripheral Interventions, Vascular
Surgery, Neurovascular, Electrophysiology and Cardiac Surgery businesses. Mr.
Gilbert oversees Business Development, Marketing Strategy and Analsyis,
E-Marketing, and Health Economics and Reimbursement functions. He is also
responsible for directing and supporting our corporate strategy process. Prior
to this role, Jim served as a Senior Vice President and led our E-Marketing,
Marketing Science, Corporate Sales and National Accounts, and Health Economics
and Reimbursement functions. Prior to joining Boston Scientific in
2004, Mr. Gilbert spent 23 years with Bain & Company, where he served as a
partner and director and was the managing partner of Bain’s Global Healthcare
Practice. Mr. Gilbert received his B.S. degree in industrial engineering and
operations research from Cornell University and his M.B.A. from Harvard Business
School.
William
Kucheman is our Senior Vice President and Group President of the Cardiovascular
Group. Mr. Kucheman joined the Company in 1995 as a result of our
acquisition of SCIMED Life Systems, Inc. Prior to his current role, he was our
Senior Vice President of Marketing. In this role, he was responsible for the
global marketing functions of our Cardiovascular group and all Corporate
Marketing functions. He oversaw the commercialization strategy for our TAXUS®
paclitaxel-eluting coronary stent system, defined and developed our
Reimbursement and Outcomes Planning functions, and initiated Marketing Science
and e-Marketing programs. Prior to that, Mr. Kucheman was our Vice President,
Corporate Marketing and our Vice President, Strategic
Marketing. Prior to joining Boston Scientific, Mr. Kucheman held a
variety of management positions in sales and marketing for SCIMED, Charter
Medical Corporation, and Control Data Corporation. He began his career at the
United States Air Force Academy Hospital and later was Healthcare Planner,
Office of the Surgeon General, for the United States Air Force Medical Service.
Mr. Kucheman has served on several industry boards including the board of
directors of the Global Health Exchange, the Committee on Payment and Policy and
AdvaMed. He has also served on the Board of Advisors to MillenniumDoctor.com and
the Board of Advisors to the College of Business, Center for Services Marketing
and Management, Arizona State University. Mr. Kucheman earned a B.S. and a
M.B.A. from Virginia Polytechnic Institute.
Sam R.
Leno is our Chief Financial Officer and Executive Vice President of Finance and
Information Systems. Mr. Leno joined us in June 2007 from Zimmer
Holdings, Inc. where he served as its Executive Vice President, Finance and
Corporate Services and Chief Financial Officer, a position to which he was
appointed in December 2005. From October 2003 to December 2005,
Mr. Leno served as Executive Vice President, Corporate Finance and
Operations, and Chief Financial Officer of Zimmer. From July 2001 to
October 2003, Mr. Leno served as Senior Vice President and Chief
Financial Officer of Zimmer. Prior to joining Zimmer, Mr. Leno served as
Senior Vice President and Chief Financial Officer of Arrow Electronics, Inc.
from March 1999 until he joined Zimmer. Between 1971 and March 1999,
Mr. Leno held various chief financial officer and other financial positions
with several U.S. based companies, and he previously served as a
U.S. Naval Officer. Mr. Leno is a member of the Board of Directors of
TomoTherapy Incorporated and is a member of its Audit Committee. Mr.
Leno earned a B.S. degree in Accounting from Northern Illinois University and an
M.B.A. from Roosevelt University.
154
William
F. McConnell, Jr. joined us in April 2006 following our acquisition of Guidant
Corporation and is our Senior Vice President, CRM Sales, Marketing &
Business Strategy. Prior to joining Boston Scientific, Mr. McConnell was Vice
President and Chief Information Officer for Guidant Corporation which he joined
in 1998. Previously, Mr. McConnell was Managing Partner — Business Consulting in
the Indianapolis office of Arthur Andersen LLP. He is Honorary Trustee of
the Children’s Museum of Indianapolis and a life member of the Board of
Directors for the American Red Cross of Greater Indianapolis. Mr.
McConnell received a B.S. degree from Miami University in Oxford, Ohio. He
majored in Systems Analysis. He is also a Certified Public
Accountant.
David
McFaul is our Senior Vice President, International. Prior to October
2007, he was our Regional President of Asia Pacific & Japan
operations. Mr. McFaul joined the Company in 1995 to oversee the
development of the Company’s Canadian business previously was President of the
Company’s Japan operations. Prior to this, Mr. McFaul was Vice President of
Sales, Inter-Continental. Previously, he was Vice President and General Manager
of the Company’s operations in Latin America, Canada and South Africa where he
increased revenue nearly 50 percent. Prior to this, Mr. McFaul was General
Manager, Canada and South Africa, Country Manager of Canada and National Sales
Manager, Canada for the Company. Prior to Boston Scientific, Mr. McFaul held
sales, marketing and general management positions at a variety of
medical-related companies including Stryker Corporation, EBI Medical Systems,
Baxter Corporation, and Abbott Labs. Mr. McFaul is currently on the Board of
Directors of Covalon Technologies Ltd. Mr. McFaul earned a B.A. in History and
Geography from Simon Fraser University and took graduate courses at Simon Fraser
University Graduate School.
Stephen
Moreci has been our Senior Vice President and Group President, Endosurgery since
December 2000. Mr. Moreci joined Boston Scientific in 1989 as Vice President and
General Manager for our Cardiac Assist business. In 1991, he was appointed Vice
President and General Manager for our Endoscopy business. In 1994, Mr. Moreci
was promoted to Group Vice President for our Urology and Gynecology businesses.
In 1997, he assumed the role of President of our Endoscopy business. In 1999, he
was named President of our Vascular business, which included peripheral
interventions, vascular surgery and oncology. In 2001, he assumed the role of
Group President, Endosurgery, responsible for our urology/gynecology, oncology,
endoscopy and Endovations businesses. Prior to joining Boston Scientific, Mr.
Moreci had a 13-year career in medical devices, including nine years with
Johnson & Johnson and four years with DermaCare. Mr. Moreci received a B.S.
degree from Pennsylvania State University.
Michael
Onuscheck was appointed to our Executive Committee in July of 2008 and is our
Senior Vice President and President of the Neuromodulation
business. Michael joined Boston Scientific in 2004 with our
acquisition of Advanced Bionics as the Vice President of Sales and Clinical
Services in our Auditory business. Most recently he was Vice President of Sales
and Marketing for the Boston Scientific’s Pain Management business. Previously,
Michael held a variety of management positions at Medtronic in spinal
reconstructive surgery and stereotactic image guided surgery. Prior to
Medtronic, he worked for Pfizer Inc., where he held a variety of sales and
marketing assignments. He is currently a director of the California Health
Institute. Michael earned a B.A. in Business Administration and Psychology from
Washington and Jefferson College.
Timothy
Pratt is our Executive Vice President, Secretary and General Counsel. Mr. Pratt
joined Boston Scientific in May of 2008 where he is responsible for worldwide
management of our legal functions. Previously, Mr. Pratt worked for
the law firm of Shook, Hardy & Bacon. He joined the firm in 1977
and became partner in 1981. He concentrated his practice in the defense of
pharmaceutical and medical device litigation and toxic tort
cases. Mr. Pratt was co-chair of Shook, Hardy’s 100-Attorney
Pharmaceutical and Medical Device Litigation Division. Mr. Pratt is
active in the Federation of Defense and Corporate Counsel (FDCC), where he
serves as a director on their board. He is also active in the
American Bar Association (ABA) and speaks regularly at the Defense Research
Institute (DRI), where he has served as chair of the DRI Corporate Counsel
Roundtable and as a member of the DRI Civil Rules Advisory
Committee. For over 20 years, Mr. Pratt has served on the faculty for
the National Institute for Trial Advocacy (NITA), and he
155
currently serves on the editorial advisory board for the BNA, Inc.
publication, Medical Devices
Law & Industry Report. Mr. Pratt received his Bachelor of
Arts degree at Tarkio College and graduated Order of the Coif from Drake
University Law School, where he served one year as editor-in-chief of the Drake Law
Review. After graduating, Mr. Pratt was law clerk to Judge
Floyd R. Gibson of the U.S. Court of Appeals for Eighth Circuit.
Kenneth
Pucel has been our Executive Vice President, Operations since November 2006 and
is responsible for our manufacturing plants in the U.S. and Ireland. Previously,
he was our Senior Vice President, Operations from December 2004 to November
2006. Prior to that Mr. Pucel was our Vice President and General Manager,
Operations from September 2002 to December 2004 and our Vice President of
Operations from June 2001 to September 2002 and before that he held various
positions in the Company’s Cardiovascular Group, including Manufacturing
Engineer, Process Development Engineer, Operations Manager, Production Manager
and Director of Operations. Mr. Pucel received a Bachelor of Science degree in
Mechanical Engineering with a focus on Biomedical Engineering from the
University of Minnesota.
Lucia
Luce Quinn joined Boston Scientific in January 2005 and is our Executive Vice
President of Human Resources. Prior to that, she was our Senior Vice
President and Assistant to the President. Prior to joining Boston Scientific,
Ms. Quinn was the Senior Vice President, Advanced Diagnostics and Business
Development for Quest Diagnostics from 2001 to 2004. In this role, Ms. Quinn was
responsible for developing multiple multi-million dollar businesses, including
evaluating and developing strategic and operational direction. Prior to this,
Ms. Quinn was Vice President, Corporate Strategic Marketing for Honeywell
International from 1999 to 2001 and before that she held various positions with
Digital Equipment Corporation from 1989 to 1998, including Corporate Vice
President, Corporate Strategy and Worldwide Brand Strategy & Management. Ms.
Quinn received her Bachelor in Arts in Management from Simmons
College.
156
ITEM
11. EXECUTIVE COMPENSATION
The
information required by this Item and set forth in our Proxy Statement to be
filed with the SEC on or about March 18, 2009, is incorporated into this
Annual Report on Form 10-K by reference.
The
information required by this Item and set forth in our Proxy Statement to be
filed with the SEC on or about March 18, 2009, is incorporated into this Annual
Report on Form 10-K by reference.
The
information required by this Item and set forth in our Proxy Statement to be
filed with the SEC on or about March 18, 2009, is incorporated into this Annual
Report on Form 10-K by reference.
The
information required by this Item and set forth in our Proxy Statement to be
filed with the SEC on or about March 18, 2009, is incorporated into this Annual
Report on Form 10-K by reference.
157
PART IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(a)(1) Financial
Statements.
The
response to this portion of Item 15 is set forth under Item 8.
(a)(2) Financial
Schedules.
The
response to this portion of Item 15 (Schedule II) follows the signature
page to this report. All other financial statement schedules are not required
under the related instructions or are inapplicable and therefore have been
omitted.
(a)(3) Exhibits
(* documents filed with this report)
|
EXHIBIT
NO.
|
TITLE |
|
3.1
|
Restated
By-laws of the Company (Exhibit 3.1(ii), Current Report on Form 8-K dated
May 11, 2007, File No.
1-11083).
|
|
3.2
|
Third
Restated Certificate of Incorporation (Exhibit 3.2, Annual Report on Form
10-K for the year ended December 31, 2007, File No.
1-11083).
|
|
4.1
|
Specimen
Certificate for shares of the Company’s Common Stock (Exhibit 4.1,
Registration No.
33-46980).
|
|
4.2
|
Description
of Capital Stock contained in Exhibits 3.1 and
3.2.
|
|
4.3
|
Indenture
dated as of June 25, 2004 between the Company and JPMorgan Chase Bank
(formerly The Chase Manhattan Bank) (Exhibit 4.1, Current Report on Form
8-K dated June 25, 2004, File No.
1-11083).
|
|
4.4
|
Indenture
dated as of November 18, 2004 between the Company and J.P. Morgan Trust
Company, National Association, as Trustee (Exhibit 4.1, Current Report on
Form 8-K dated November 18, 2004, File No.
1-11083).
|
|
4.5
|
Form
of First Supplemental Indenture dated as of April 21, 2006 (Exhibit 99.4,
Current Report on Form 8-K dated April 21, 2006, File No.
1-11083).
|
|
4.6
|
Form
of Second Supplemental Indenture dated as of April 21, 2006 (Exhibit 99.6,
Current Report on Form 8-K dated April 21, 2006, File No.
1-11083).
|
|
4.7
|
5.45%
Note due June 15, 2014 in the aggregate principal amount of $500,000,000
(Exhibit 4.2, Current Report on Form 8-K dated June 25, 2004, File No.
1-11083).
|
|
4.8
|
5.45%
Note due June 15, 2014 in the aggregate principal amount of $100,000,000
(Exhibit 4.3, Current Report on Form 8-K dated June 25, 2004, File No.
1-11083).
|
158
|
4.9
|
Form
of Global Security for the 5.125% Notes due 2017 in the aggregate
principal amount of $250,000,000 (Exhibit 4.3, Current Report
on Form 8-K dated November 18, 2004, File No.
1-11083).
|
|
4.10
|
Form
of Global Security for the 4.250% Notes due 2011 in the aggregate
principal amount of $250,000,000 (Exhibit 4.2, Current Report on Form 8-K
dated November 18, 2004, File No.
1-11083).
|
|
4.11
|
Form
of Global Security for the 5.50% Notes due 2015 in the aggregate principal
amount of $400,000,000, and form of Notice to the holders thereof (Exhibit
4.1, Current Report on Form 8-K dated November 17, 2005 and Exhibit 99.5,
Current Report on Form 8-K dated April 21, 2006, File No.
1-11083).
|
|
4.12
|
Form
of Global Security for the 6.25% Notes due 2035 in the aggregate principal
amount of $350,000,000, and form of Notice to holders thereof (Exhibit
4.2, Current Report on Form 8-K dated November 17, 2005 and Exhibit 99.7,
Current Report on Form 8-K dated April 21, 2006, File No.
1-11083).
|
|
4.13
|
Indenture
dated as of June 1, 2006 between the Company and JPMorgan Chase Bank,
N.A., as Trustee (Exhibit 4.1, Current Report on Form 8-K dated June 9,
2006, File No.
1-11083).
|
|
4.14
|
Form
of Global Security for the 6.00% Notes due 2011 in the aggregate principal
amount of $600,000,000 (Exhibit 4.2, Current Report on Form 8-K dated June
9, 2006, File No.
1-11083).
|
|
4.15
|
Form
of Global Security for the 6.40% Notes due 2016 in the aggregate principal
amount of $600,000,000 (Exhibit 4.3, Current Report on Form 8-K dated June
9, 2006, File No.
1-11083).
|
|
10.1
|
Form
of Amended and Restated Credit and Security Agreement dated as of November
7, 2007 by and among Boston Scientific Funding Corporation, the Company,
Old Line Funding, LLC, Victory Receivables Corporation, The Bank of
Tokyo-Mitsubishi Ltd., New York Branch and Royal Bank of Canada (Exhibit
10.1, Current Report on Form 8-K dated November 7, 2007, File No.
1-11083).
|
|
10.2
|
Form
of Amendment No. 1 to Amended and Restated Credit and Security Agreement
and Restatement of Amended Fee Letters dated as of August 6, 2008 by and
among Boston Scientific Funding LLC, the Company, Old Line Funding, LLC,
Victory Receivables Corporation, The Bank of Tokyo-Mitsubishi UFJ, Ltd.,
New York Branch and Royal Bank of Canada (Exhibit 10.1, Quarterly Report
on Form 10-Q for the quarter ended June 30, 2008, File No.
1-11083).
|
|
10.3
|
Form
of Omnibus Amendment dated as of December 21, 2006 among the Company,
Boston Scientific Funding Corporation, Variable Funding Capital Company
LLC, Victory Receivables Corporation and The Bank of Tokyo-Mitsubishi UFJ,
Ltd., New York Branch (Amendment No. 1 to Receivables Sale Agreement
and Amendment No. 9 to Credit and Security Agreement) (Exhibit 10.2,
Annual Report on 10-K year ended December 31, 2006, File No.
1-11083).
|
|
10.4
|
Form
of Amended and Restated Receivables Sale Agreement dated as of November 7,
2007 between the Company and each of its Direct or Indirect Wholly-Owned
Subsidiaries that Hereafter Becomes a Seller Hereunder, as the Sellers,
and Boston Scientific Funding Corporation, as the Buyer (Exhibit 10.2,
Current Report on Form 8-K dated November 7, 2007, File No.
1-11083).
|
|
10.5
|
Form
of Credit Agreement dated as of April 21, 2006 among the Company, BSC
International Holding Limited, Merrill Lynch Capital Corporation, Bear
Stearns Corporate Lending Inc., Deutsche Bank Securities Inc., Wachovia
Bank, National Association, Bank of America, N.A., Banc of America
Securities LLC, Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner
& Smith Incorporated, as amended (Exhibit 99.1, Current Report on Form
8-K dated April 21, 2006, Exhibit 10.1, Current Report on Form 8-K dated
August 17, 2007, and Exhibit 10.1, Current Report on Form 8-K dated
February 20, 2009, File No.
1-11083).
|
159
|
10.6
|
License
Agreement among Angiotech Pharmaceuticals, Inc., Cook Incorporated and the
Company dated July 9, 1997, and related Agreement dated December 13, 1999
(Exhibit 10.6, Annual Report on Form 10-K for the year ended December 31,
2002, File No.
1-11083).
|
|
10.7
|
Amendment
between Angiotech Pharmaceuticals, Inc. and the Company dated November 23,
2004 modifying July 9, 1997 License Agreement among Angiotech
Pharmaceuticals, Inc., Cook Incorporated and the Company (Exhibit 10.1,
Current Report on Form 8-K dated November 23, 2004, File No.
1-11083).
|
|
10.8
|
Form
of Amendment Agreement among the Company, Boston Scientific Scimed Inc.,
Advanced Bionics Corporation, The Bionics Trust and Jeffrey D. Goldberg
and Carla Woods (collectively in their capacity as the Stockholders’
Representative) dated August 9, 2007 (Exhibit 10.1, Current Report on Form
8-K dated August 9, 2007, File No.
1-11083).
|
|
10.9
|
Form
of Amendment No. 2 to Agreement and Plan of Merger among the Company,
Boston Scientific Scimed Inc., Advanced Bionics Corporation, the Bionics
Trust and Jeffrey D. Goldberg and Carla Woods (collectively in their
capacity as the Stockholders’ Representative) dated as of August 9, 2007
(Exhibit 10.1, Current Report on Form 8-K dated January 3, 2008, File No.
1-11083).
|
|
10.10
|
Form
of Offer Letter between Boston Scientific and Donald S. Baim, M.D.
(Exhibit 10.1, Current Report on Form 8-K dated July 27, 2006, File No.
1-11083).
|
|
10.11
|
Form
of Stock Option Agreement dated as of July 25, 2006 between Boston
Scientific and Donald S. Baim, M.D. (Exhibit 10.2, Current Report on Form
8-K dated July 27, 2006, File No.
1-11083).
|
|
10.12
|
Form
of Deferred Stock Unit Agreement dated as of July 25, 2006 between Boston
Scientific and Donald S. Baim, M.D. (Exhibit 10.3, Current Report on Form
8-K dated July 27, 200, File No.
1-11083).
|
|
10.13
|
Form
of Indemnification Agreement between the Company and certain Directors and
Officers (Exhibit 10.16, Registration No.
33-46980).
|
|
10.14
|
Form
of Retention Agreement between the Company and certain Executive Officers,
as amended (Exhibit 10.1, Current Report on Form 8-K dated February 20,
2007 and Exhibit 10.6, Current Report on Form 8-K dated December 16, 2008,
File No. 1-11083).
|
|
10.15
|
Form
of Non-Qualified Stock Option Agreement (vesting over three years)
(Exhibit 10.1, Current Report on Form 8-K dated December 10, 2004, File
No. 1-11083).
|
|
10.16
|
Form
of Non-Qualified Stock Option Agreement (vesting over four years) (Exhibit
10.2, Current Report on Form 8-K dated December 10, 2004, File No.
1-11083).
|
160
|
10.17
|
Form
of Non-Qualified Stock Option Agreement (vesting over two years) (Exhibit
10.20, Annual Report on Form 10-K for the year ended December 31, 2007,
File No. 1-11083).
|
|
10.18
|
Form
of Restricted Stock Award Agreement (Exhibit 10.3, Current Report on Form
8-K dated December 10, 2004, File No.
1-11083).
|
|
10.19
|
Form
of Deferred Stock Unit Award Agreement (Exhibit 10.4, Current Report on
Form 8-K dated December 10, 2004, File No.
1-11083).
|
|
10.20
|
Form
of Deferred Stock Unit Award Agreement (vesting over four years) (Exhibit
10.16, Annual Report on 10-K for the year ended December 31, 2006, File
No. 1-11083).
|
|
10.21
|
Form
of Deferred Stock Unit Award Agreement (vesting over two years)
(Exhibit 10.24, Annual Report on Form 10-K for the year ended December 31,
2007, File No.
1-11083).
|
|
10.22
|
Form
of Non-Qualified Stock Option Agreement (Non-employee Directors) (Exhibit
10.5, Current Report on Form 8-K dated December 10, 2004, File No.
1-11083).
|
|
10.23
|
Form
of Restricted Stock Award Agreement (Non-Employee Directors) (Exhibit
10.6, Current Report on Form 8-K dated December 10, 2004, File No.
1-11083).
|
|
10.24
|
Form
of Deferred Stock Unit Award Agreement (Non-Employee Directors) (Exhibit
10.7, Current Report on Form 8-K dated December 10, 2004, File No.
1-11083).
|
|
10.25
|
Boston
Scientific Corporation 401(k) Retirement Savings Plan, as Amended and
Restated, Effective January 1, 2001, and amended (Exhibit 10.12, Annual
Report on Form 10-K for the year ended December 31, 2002, Exhibit 10.12,
Annual Report on Form 10-K for the year ended December 31, 2003, Exhibit
10.1, Current Report on Form 8-K dated September 24, 2004, Exhibit 10.52,
Annual Report on Form 10-K for year ended December 31, 2005, Exhibit
10.21, Annual Report on Form 10-K for year ended December 31, 2007, and
Exhibit 10.2, Current Report on Form 8-K dated December 16, 2008, File No.
1-11083).
|
|
10.26
|
Boston
Scientific Corporation 2006 Global Employee Stock Ownership Plan, as
amended (Exhibit 10.23, Annual Report on Form 10-K for the year ended
December 31, 2006 and Exhibit 10.24, Annual Report on Form 10-K for the
year ended December 31, 2006, File No.
1-11083).
|
|
10.27
|
Boston
Scientific Corporation Non – Employee Director Deferred Compensation Plan,
as amended and restated, effective January 1, 2009 (Exhibit 10.1, Current
Report on Form 8-K dated October 28, 2008, File No.
1-11083).
|
|
10.28
|
Boston
Scientific Corporation 1992 Non-Employee Directors' Stock Option Plan, as
amended (Exhibit 10.2, Annual Report on Form 10-K for the year ended
December 31, 1996, Exhibit 10.3, Annual Report on Form 10-K for the year
ended December 31, 2000 and Exhibit 10.1, Current Report on Form 8-K dated
December 31, 2004, File
No.1-11083).
|
|
10.29
|
Boston
Scientific Corporation 2003 Long-Term Incentive Plan, as Amended and
Restated, Effective June 1, 2008 (Exhibit 10.1, Quarterly Report on Form
10-Q for the quarter ended March 31, 2008, File No.
1-11083).
|
|
10.30
|
Boston
Scientific Corporation 2000 Long Term Incentive Plan, as amended (Exhibit
10.20, Annual Report on Form 10-K for the year ended December 31, 1999,
Exhibit 10.18, Annual Report on Form 10-K for the year ended December 31,
2001, Exhibit 10.1, Current Report on Form 8-K dated December 22, 2004 and
Exhibit 10.3, Current Report on Form 8-K dated May 9, 2005, and Exhibit
10.3, Current Report on Form 8-K dated December 16, 2008, File No.
1-11083).
|
|
10.31
|
Boston
Scientific Corporation 1995 Long-Term Incentive Plan, as amended (Exhibit
10.1, Annual Report on Form 10-K for the year ended December 31, 1996,
Exhibit 10.5, Annual Report on Form 10-K for the year ended December 31,
2001, Exhibit 10.1, Current Report on Form 8-K dated December 22, 2004 and
Exhibit 10.3, Current Report on Form 8-K dated May 9, 2005, File No.
1-11083).
|
|
10.32
|
Boston
Scientific Corporation 1992 Long-Term Incentive Plan, as amended (Exhibit
10.1, Annual Report on Form 10-K for the year ended December 31, 1996,
Exhibit 10.2, Annual Report on Form 10-K for the year ended December 31,
2001, Exhibit 10.1, Current Report on Form 8-K dated December 22, 2004 and
Exhibit 10.3, Current Report on Form 8-K dated May 9, 2005, File No.
1-11083).
|
161
|
10.33
|
Form
of Deferred Stock Unit Agreement between Lucia L. Quinn and Boston
Scientific Corporation dated May 31, 2005 (Exhibit 10.1, Current Report on
Form 8-K dated May 31, 2005, File No.
1-11083).
|
|
10.34
|
Form
of Boston Scientific Corporation Excess Benefit Plan, as amended (Exhibit
10.1, Current Report on Form 8-K dated June 29, 2005 and Exhibit 10.4,
Current Report on Form 8-K dated December 16, 2008, File No.
1-11083).
|
|
10.35
|
Form
of Trust Under the Boston Scientific Corporation Excess Benefit Plan
(Exhibit 10.2, Current Report on Form 8-K dated June 29, 2005, File No.
1-11083).
|
|
10.36
|
Form
of Non-Qualified Stock Option Agreement dated July 1, 2005 (Exhibit 10.1,
Current Report on Form 8-K dated July 1, 2005, File No.
1-11083).
|
|
10.37
|
Form
of Deferred Stock Unit Award Agreement dated July 1, 2005 (Exhibit 10.2,
Current Report on Form 8-K dated July 1, 2005, File No.
1-11083).
|
|
10.38
|
Form
of 2008 Performance Incentive Plan (Exhibit 10.1, Current Report on Form
8-K dated January 23, 2008, File No.
1-11083).
|
|
10.39
|
Form
of 2009 Performance Incentive Plan (Exhibit 10.1, Current Report on Form
8-K dated December 16, 2008, File No.
1-11083).
|
|
10.40
|
Form
of Non-Qualified Stock Option Agreement (Executive) (Exhibit 10.1, Current
Report on Form 8-K dated May 12, 2006, File No.
1-11083).
|
|
10.41
|
Form
of Deferred Stock Unit Award Agreement (Executive) (Exhibit 10.2, Current
Report on Form 8-K dated May 12, 2006, File No.
1-11083).
|
|
10.42
|
Form
of Non-Qualified Stock Option Agreement (Special) (Exhibit 10.3, Current
Report on Form 8-K dated May 12, 2006, File No.
1-11083).
|
|
10.43
|
Form
of Deferred Stock Unit Award Agreement (Special) (Exhibit 10.4, Current
Report on Form 8-K dated May 12, 2006, File No.
1-11083).
|
|
10.44
|
Embolic
Protection Incorporated 1999 Stock Plan, as amended (Exhibit 10.1,
Registration Statement on Form S-8, Registration No. 333-61060 and Exhibit
10.1, Current Report on Form 8-K dated December 31, 2004, File No.
1-11083).
|
|
10.45
|
Quanam
Medical Corporation 1996 Stock Plan, as amended (Exhibit 10.3,
Registration Statement on Form S-8, Registration No. 333-61060 and Exhibit
10.1, Current Report on Form 8-K dated December 31, 2004, File No.
1-11083).
|
162
|
10.46
|
RadioTherapeutics
Corporation 1994 Stock Incentive Plan, as amended (Exhibit 10.1,
Registration Statement on Form S-8, Registration No. 333-76380 and Exhibit
10.1, Current Report on Form 8-K dated December 31, 2004, File No.
1-11083).
|
|
10.47
|
Guidant
Corporation 1994 Stock Plan, as amended (Exhibit 10.46, Annual Report on
Form 10-K for the year ended December 31, 2006, File No.
1-11083).
|
|
10.48
|
Guidant
Corporation 1996 Nonemployee Director Stock Plan, as amended (Exhibit
10.47, Annual Report on Form 10-K for the year ended December 31, 2006,
File No. 1-11083).
|
|
10.49
|
Guidant
Corporation 1998 Stock Plan, as amended (Exhibit 10.48, Annual Report on
Form 10-K for the year ended December 31, 2006, File No.
1-11083).
|
|
10.50
|
Form
of Guidant Corporation Option Grant (Exhibit 10.49, Annual Report on Form
10-K for the year ended December 31, 2006, File No.
1-11083).
|
|
10.51
|
Settlement
Agreement effective September 21, 2005 among Medinol Ltd., Jacob Richter
and Judith Richter and Boston Scientific Corporation, Boston Scientific
Limited and Boston Scientific Scimed, Inc. (Exhibit 10.1, Current Report
on Form 8-K dated September 21, 2005, File No.
1-11083).
|
|
10.52
|
Transaction
Agreement, dated as of January 8, 2006, as amended, between Boston
Scientific Corporation and Abbott Laboratories (Exhibit 10.47, Exhibit
10.48, Exhibit 10.49 and Exhibit 10.50, Annual Report on Form 10-K for
year ended December 31, 2005, Exhibit 10.1, Current Report on Form 8-K
dated April 7, 2006, File No.
1-11083).
|
|
10.53
|
Purchase
Agreement between Guidant Corporation and Abbott Laboratories dated April
21, 2006, as amended (Exhibit 10.2 and Exhibit 10.3, Quarterly Report on
Form 10-Q for the quarter ended June 30, 2006, File No.
1-11083).
|
|
10.54
|
Promissory
Note between BSC International Holding Limited (“Borrower”) and Abbott
Laboratories (“Lender”) dated April 21, 2006 in the aggregate principal
amount of $900,000,000 (Exhibit 10.4, Quarterly Report on Form 10-Q for
the quarter ended June 30, 2006, File No.
1-11083).
|
|
10.55
|
Decision
and Order of the Federal Trade Commission in the matter of Boston
Scientific Corporation and Guidant Corporation finalized August 3, 2006
(Exhibit 10.5, Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006, File No.
1-11083).
|
|
10.56
|
Boston
Scientific Executive Allowance Plan, as amended (Exhibit 10.53, Annual
Report on Form 10-K for year ended December 31, 2005, Exhibit 10.1,
Current Report on Form 8-K dated October 30, 2007, and Exhibit 10.2,
Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, File
No. 1-11083).
|
|
10.57
|
Boston
Scientific Executive Retirement Plan, as amended (Exhibit 10.54, Annual
Report on Form 10-K for year ended December 31, 2005 and Exhibit 10.5,
Current Report on Form 8-K dated December 16, 2008, File No.
1-11083).
|
|
10.58
|
Form
of Deferred Stock Unit Agreement between James R. Tobin and the Company
dated February 28, 2006, as amended (2000 Long-Term Incentive Plan)
(Exhibit 10.56, Annual Report on Form 10-K for year ended December 31,
2005 and Exhibit 10.7, Current Report on Form 8-K dated December 16, 2008,
File No. 1-11083).
|
|
10.59
|
Form
of Deferred Stock Unit Agreement between James R. Tobin and the Company
dated February 28, 2006, as amended (2003 Long-Term Incentive Plan)
(Exhibit 10.57, Annual Report on Form 10-K for year ended December 31,
2005 and Exhibit 10.8, Current Report on Form 8-K dated December 16, 2008,
File No. 1-11083).
|
|
10.60
|
Form
of Severance Pay and Layoff Notification Plan as Amended and Restated
effective as of November 1, 2007 (Exhibit 10.1, Current Report on Form 8-K
dated November 1, 2007, File No.
1-11083).
|
163
|
10.61
|
Form
of Offer Letter between Boston Scientific and Sam R. Leno dated April 11,
2007 (Exhibit 10.1, Current Report on Form 8-K dated May 7, 2007, File No.
1-11083).
|
|
10.62
|
Form
of Deferred Stock Unit Award dated June 5, 2007 between Boston Scientific
and Sam R. Leno (Exhibit 10.1, Quarterly Report on Form 10-Q for period
ended June 30, 2007, File No.
1-11083).
|
|
10.63
|
Form
of Non-Qualified Stock Option Agreement dated June 5, 2007 between Boston
Scientific and Sam R. Leno (Exhibit 10.2, Quarterly Report on Form 10-Q
dated June 30, 2007, File-No.
1-11083).
|
|
10.64
|
Form
of Transition and Separation Agreement dated May 23, 2008 between Boston
Scientific and Paul A. LaViolette (Exhibit 10.1, Current Report on Form
8-K dated May 30, 2008, File No.
1-11083).
|
|
*10.65
|
Form
of Offer Letter between Boston Scientific and Jeffrey Capello dated May
16, 2008.
|
|
*10.66
|
Form
of Non-Qualified Stock Option Agreement dated February 24, 2009 between
Boston Scientific and James R.
Tobin.
|
|
*11
|
Statement
regarding computation of per share earnings (included in Note O – Weighted-average
Shares Outstanding to the Company's 2008 consolidated financial
statements for the year ended December 31, 2008 included in Item
8).
|
|
*12
|
Statement
regarding computation of ratios of earnings to fixed
charges.
|
|
14
|
Code
of Conduct (Exhibit 14, Annual Report on Form 10-K for the year ended
December 31, 2005, File No.
1-11083).
|
|
*21
|
List
of the Company’s subsidiaries as of February 20,
2009.
|
|
*23
|
Consent
of Independent Registered Public Accounting Firm, Ernst & Young,
LLP.
|
|
*31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
*31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
*32.1
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
*32.2
|
Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
164
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, Boston Scientific Corporation duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
|
Dated:
February 27, 2009
|
By:
|
/s/ Sam R. Leno | |
|
Sam
R. Leno
|
|||
|
Chief
Financial Officer
|
|||
|
Dated:
February 27, 2009
|
By:
|
/s/
Jeffrey D. Capello
|
|
|
Jeffrey
D. Capello
|
|||
|
Chief
Accounting Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of Boston Scientific Corporation
and in the capacities and on the dates indicated.
|
Dated:
February 27, 2009
|
By:
|
/s/
John E. Abele
|
|
|
John
E. Abele
|
|||
|
Director,
Founder
|
|
Dated:
February 27, 2009
|
By:
|
/s/
Ursula M. Burns
|
|
|
Ursula
M. Burns
|
|||
|
Director
|
|
Dated:
February 27, 2009
|
By:
|
/s/
Nancy-Ann DeParle
|
|
|
Nancy-Ann
DeParle
|
|||
|
Director
|
|
Dated:
February 27, 2009
|
By:
|
/s/
J. Raymond Elliott
|
|
|
J.
Raymond Elliott
|
|||
|
Director
|
|
Dated:
February 27, 2009
|
By:
|
/s/
Joel L. Fleishman
|
|
|
Joel
L. Fleishman
|
|||
|
Director
|
165
|
Dated:
February 27, 2009
|
By:
|
/s/ Marye Anne Fox, Ph.D. | |
|
Marye
Anne Fox, Ph.D.
|
|||
|
Director
|
|
Dated:
February 27, 2009
|
By:
|
/s/
Ray J. Groves
|
|
|
Ray
J. Groves
|
|||
|
Director
|
|
Dated:
February 27, 2009
|
By:
|
/s/
Kristina M. Johnson, Ph.D.
|
|
|
Kristina
M. Johnson, Ph.D
|
|||
|
Director
|
|
Dated:
February 27, 2009
|
By:
|
/s/
Ernest Mario, Ph.D.
|
|
|
Ernest
Mario, Ph.D.
|
|||
|
Director
|
|
Dated:
February 27, 2009
|
By:
|
/s/
N.J. Nicholas, Jr.
|
|
|
N.J.
Nicholas, Jr.
|
|||
|
Director
|
|
Dated:
February 27, 2009
|
By:
|
/s/
Pete M. Nicholas
|
|
|
Pete
M. Nicholas
|
|||
|
Director,
Founder, Chairman of the Board
|
|
Dated:
February 27, 2009
|
By:
|
/s/
John E. Pepper
|
|
|
John
E. Pepper
|
|||
|
Director
|
|
Dated:
February 27, 2009
|
By:
|
/s/
Uwe E. Reinhardt, Ph.D.
|
|
|
Uwe
E. Reinhardt, Ph.D.
|
|||
|
Director
|
166
|
Dated:
February 27, 2009
|
By:
|
/s/
Senator Warren B. Rudman
|
|
|
Senator
Warren B. Rudman
|
|||
|
Director
|
|
Dated:
February 27, 2009
|
By:
|
/s/
James R. Tobin
|
|
|
James
R. Tobin
|
|||
|
Director,
President and Chief Executive Officer
|
|||
|
(Principal
Executive Officer)
|
167
Schedule
II
VALUATION
AND QUALIFYING ACCOUNTS (in millions)
|
Description
|
Balance
Beginning of Year
|
Charges
to Costs and Expenses
|
Deductions
to Allowances for Uncollectible Accounts (a)
|
Charges
to (Deductions from) Other
Accounts
(b)
|
Balance
at End of Year
|
|||||||||||||||
|
Year
Ended December 31, 2008:
|
||||||||||||||||||||
|
Allowances
for uncollectible accounts and sales returns and
allowances
|
$ | 137 | $ | 8 | $ | (11 | ) | $ | (3 | ) | $ | 131 | ||||||||
|
Year
Ended December 31, 2007:
|
||||||||||||||||||||
|
Allowances
for uncollectible accounts and sales returns and
allowances
|
$ | 135 | 15 | (13 | ) | $ | 137 | |||||||||||||
|
Year
Ended December 31, 2006:
|
||||||||||||||||||||
|
Allowances
for uncollectible accounts and sales returns and
allowances
|
$ | 83 | 27 | (7 | ) | 32 | $ | 135 | ||||||||||||
|
(a)
Uncollectible amounts written off.
|
||||||||||||||||||||
|
(b)
Represents charges for sales returns and allowances, net of actual sales
returns.
|
||||||||||||||||||||
168