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
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For the fiscal year ended
December 31, 2007
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Commission File No.
1-11083
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BOSTON SCIENTIFIC
CORPORATION
(Exact
Name Of Company As Specified In Its Charter)
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DELAWARE
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04-2695240
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(State
of Incorporation)
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(I.R.S.
Employer Identification No.)
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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:
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COMMON STOCK, $.01 PAR VALUE
PER SHARE
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NEW YORK STOCK
EXCHANGE
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(Title
Of Class)
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(Name
of Exchange on Which Registered)
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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, or a non-accelerated filer (as defined in Rule 12b-2 of the
Act).
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Large Accelerated
Filer x
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Accelerated
Filer o
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Non-Accelerated
Filer o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes: o No
x
The
aggregate market value of the Company’s common stock held by non-affiliates of
the Company was approximately $20.5 billion based on the closing price of the
Company’s common stock on June 29, 2007, 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,
2008, was 1,492,320,521.
TABLE OF CONTENTS
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PART
I
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3
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ITEM
1. BUSINESS
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3
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ITEM
1A. RISK FACTORS
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25
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ITEM
1B. UNRESOLVED STAFF COMMENTS
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34
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ITEM
2. PROPERTIES
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34
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ITEM
3. LEGAL PROCEEDINGS
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34
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ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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34
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PART
II
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35
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ITEM
5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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35
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ITEM
6. SELECTED FINANCIAL DATA
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37
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ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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38
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ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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68
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ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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70
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ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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138
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ITEM
9A. CONTROLS AND PROCEDURES
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138
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ITEM
9B. OTHER INFORMATION
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138
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PART
III
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139
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ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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139
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ITEM
11. EXECUTIVE COMPENSATION
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146
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ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
RELATED STOCKHOLDER MATTERS
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146
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ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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146
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ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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146
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PART
IV
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147
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ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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147
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SIGNATURES
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154
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2
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,
oncology, 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; opening obstructions and bringing relief to patients
suffering from various forms of cancer; 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
$8.4 billion in 2007.
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. Our 2006 acquisition of Guidant Corporation, a world leader in
the treatment of cardiac disease, enabled us to become a major provider in the
$10 billion global 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 acquisitions have helped us 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.
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 and scientific research of
drug-eluting stent systems.
3
Since its
U.S. launch in March 2004 and its launch in our Europe and
Inter-Continental markets in 2003, our proprietary polymer-based
paclitaxel-eluting stent technology for reducing coronary restenosis, the TAXUS®
Express2™ coronary stent
system, has become the worldwide leader in the drug-eluting coronary stent
market. In addition, we now have access to a second drug-eluting coronary
stent program, which complements our existing TAXUS stent system. During the
fourth quarter of 2006, we initiated a limited launch of the PROMUSÔ everolimus-eluting
coronary stent system, which is a private-labeled XIENCEÔ V drug-eluting
stent system supplied to us by Abbott Laboratories, in certain European
countries and, during 2007, expanded our launch in Europe, as well as in
key countries in other regions. In June 2007, Abbott submitted the final module
of a pre-market approval (PMA) application to the FDA seeking approval in the
U.S. for both the XIENCE V and PROMUS stent systems. In November 2007, the FDA
advisory panel reviewing Abbott’s PMA submission voted to recommend the stent
systems for approval. Following FDA approval, which Abbott is expecting in the
first half of 2008, we plan to launch the PROMUS stent system in the
U.S.
We
continue to enhance our product offerings in the drug-eluting stent market. We
successfully launched our next-generation drug-eluting stent product, the TAXUS®
Liberté® stent system, during 2005 in our Europe and Inter-Continental markets,
and expect to launch the product in the U.S. in the second half of 2008, subject
to regulatory approval. The Liberté coronary stent is designed to further
enhance deliverability and conformability, particularly in challenging
lesions.
Our U.S.
TAXUS stent system sales decreased in 2007 relative to 2006, due in part to a
decline in the size of the U.S. market following recent uncertainty regarding
the perceived risk of late stent thrombosis1 following the use of drug-eluting stents.
However, we believe that recent data addressing this risk and supporting the
safety of drug-eluting stent systems could positively affect the size of the
drug-eluting stent market, as referring cardiologists regain confidence in this
technology.
The Cardiac Rhythm Management
Opportunity
As a
result of our 2006 acquisition of Guidant, we now develop, manufacture and
market products that focus on the treatment of cardiac arrhythmias and heart
failure. Natural electrical impulses stimulate the heart’s chambers to pump
blood. In healthy individuals, the electrical current causes the heart to beat
at an appropriate rate and in synchrony. We manufacture a variety of implantable
devices that monitor the heart and deliver electricity to treat cardiac
abnormalities, including:
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·
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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 |
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·
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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.
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Tachycardia
(abnormally fast or chaotic heart rhythms) prevents the heart from pumping blood
efficiently and can lead to sudden cardiac death. 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.
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1
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Late stent thrombosis is the
formation of a clot, or thrombus, within the stented area one year or more
after implantation of the
stent.
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4
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. 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. Available as an optional component to the system is the
LATITUDE Weight Scale and Blood Pressure Monitor. 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.
Strategic
Initiatives
In 2007,
we announced several new initiatives designed to enhance short- and long-term
shareholder value, including:
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·
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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;
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the
sale of five non-strategic businesses, including our Auditory, Cardiac
Surgery, Vascular Surgery, Venous Access and Fluid Management businesses;
and
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significant
expense and head count reductions.
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Our goal
is 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. We expect these
initiatives to help provide better focus on our core businesses and priorities,
which will strengthen Boston Scientific for the future and position us for
increased, sustainable and profitable sales growth. Each of these
initiatives are described more fully in our Management’s Discussion and Analysis
included in Item 7 of this Form 10-K.
Business Strategy
Our
mission is to improve the quality of patient care and the productivity of
healthcare delivery through the development and advocacy of less-invasive
medical devices and procedures. We believe that the pursuit of this mission will
enhance shareholder value. We intend to accomplish our mission through the
continuing refinement of existing products and procedures and the investigation
and development of new technologies that can reduce risk, trauma, cost,
procedure time and the need for aftercare. Our approach to innovation combines
internally developed products and technologies with those we obtain externally
through acquisitions and alliances. Our research and development program is
largely focused on the development of
5
next-generation
and novel technology offerings across multiple programs and divisions. Key
elements of our overall business strategy include the following:
Product
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 have made an overarching effort to elevate quality thinking in all that we
do. In 2007, 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. We also engaged a third party to audit our corporate-wide
quality systems as we strive to improve those systems continuously. In
addition, our Board of Directors has created a Compliance and Quality Committee
to monitor our compliance and quality initiatives. 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.
Innovation
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 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.
Clinical
Excellence
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 2007, 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.
Product
Diversity
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 medical specialists and purchasing
organizations to satisfy many of their less-invasive medical device requirements
from a single source.
Operational
Excellence
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, supplier
controls, distribution controls and providing our operations teams with the
training and tools necessary to drive continuous improvement in product quality.
In 2007, we also focused on examining our operations and general business
activities to identify cost-improvement opportunities in order to enhance our
operational effectiveness. We intend to continue these efforts in
2008.
6
Customer Focused
Marketing
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.
Active Participation in the Medical
Community
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.
Corporate
Culture
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 now places quality at the top of its priorities. 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.
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 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 2007, we expended $1.091 billion on research and development,
representing approximately 13 percent of our 2007 net sales. Our investment in
research and development reflects:
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·
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regulatory
compliance and clinical research, particularly relating to our
next-generation stent and CRM platforms and other development programs
obtained through our acquisitions;
and
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·
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sustaining
engineering efforts which factor customer (or “post market”) feedback into
continuous improvement efforts for currently marketed
products.
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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 2007 acquisitions
included the following:
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·
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EndoTex
Interventional Systems, Inc., a developer of stents used in the treatment
of stenotic lesions in the carotid arteries, intended to expand our
carotid artery disease portfolio;
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·
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Remon
Medical Technologies, Inc., a development-stage company focused on
creating communication technology for medical device applications,
intended to expand our sensor and wireless communication technology
portfolio and complement our CRM product line;
and
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·
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Celsion
Corporation’s Prolieve®
Thermodilatation System, technology for treating symptomatic benign
prostatic hyperplasia (BPH), intended to expand our technology portfolio
used to treat urologic conditions.
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Our
investment portfolio includes investments in both publicly traded and
privately held companies. Many of these alliances involve complex
arrangements with third parties and some include the option to purchase these
companies at pre-established future dates, generally upon the attainment of
performance, regulatory and/or revenue milestones. These arrangements allow us
to evaluate new technologies prior to acquiring them. We expect that we will
continue to focus selectively on 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—Cardiovascular (including our Interventional Cardiology, CRM and
Cardiovascular businesses), Endosurgery (including our Endoscopy and
Urology/Gynecology businesses, and until February 2008, included our Oncology
business) and Neuromodulation (including our Pain Management business, and,
until January 2008, included our Auditory business). In February 2008, we
completed the sale of our Venous Access franchise, previously part of our
Oncology business, along with our Fluid Management business, and integrated our
remaining Oncology franchises into other business units. In addition, in January
2008, we completed the sale of a controlling interest in our Auditory business,
along with our drug pump development program, to entities affiliated with the
former principal shareholders of Advanced Bionics Corporation. Our
Cardiovascular organization focuses on products and technologies for use in
interventional cardiology, cardiac rhythm management, peripheral interventions,
electrophysiology, neurovascular, and, until January 2008, cardiac surgery and
vascular surgery procedures. In January 2008, we completed the sale of our
Cardiac Surgery and Vascular Surgery businesses. During 2007, we derived
78 percent of our net sales from our Cardiovascular businesses,
approximately 18 percent from our Endosurgery businesses and approximately
four percent from our Neuromodulation business.
The
following section describes certain of our Cardiovascular, Endosurgery and
Neuromodulation offerings as of December 31, 2007, before the divestitures of
certain of our businesses:
Cardiovascular
Coronary Stent
Business
Drug-Eluting
Stents
We are
the market leader in the worldwide drug-eluting stent market. We market our
TAXUS® Express2Ô paclitaxel-eluting
coronary stent system principally in the U.S. and Japan. We also market our
second-generation coronary stent, the TAXUS® Liberté® stent system, in our
Europe and Inter-Continental markets. We expect to launch the TAXUS Liberté
coronary stent system in the U.S. in the second half of 2008,
8
subject
to regulatory approval. In December 2007, we received CE Mark approval for the
use of the TAXUS® Liberté® stent system in diabetic patients, and, in May 2007,
we received CE Mark approval for our TAXUS Liberté Long stent, a specialty stent
designed for more efficient stenting of long lesions.
In the
fourth quarter of 2006, we began marketing our PROMUSÔ everolimus-eluting
coronary stent system in certain of our Europe and Inter-Continental countries,
expanding our drug-eluting stent portfolio to include two distinct drug
platforms. We expect to launch the PROMUS stent system in the U.S. in the first
half of 2008, subject to regulatory approval. We also expect to launch an
internally developed and manufactured next-generation everolimus-based stent
system in Europe in late 2009 or early 2010 and in the U.S. in late 2012 or
early 2013. In addition, we have commenced clinical trials for our
third-generation paclitaxel-eluting stent, the TAXUS® Element™ platinum
chromium coronary stent system. In July 2007, we announced the first
implant of the TAXUS Element stent system.
Bare-Metal
Stents
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.
Cardiac Surgery and Vascular
Surgery
Cardiac
surgery devices are used to perform endoscopic vessel harvesting, cardiac
surgical ablation and less-invasive coronary artery by-pass surgery. Vascular
Surgery devices include abdominal, thoracic and peripheral vascular grafts for
the treatment of aortic aneurysms and dissections, peripheral vascular occlusive
diseases and dialysis access. In connection with our strategic initiatives, we
identified these businesses as non-strategic and, in January 2008, completed the
sale of our Cardiac Surgery business (acquired with Guidant) and Vascular
Surgery business to the Getinge Group of Sweden.
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. We also market a broad line of fluid delivery sets,
pressure monitoring systems, custom kits and accessories that enable the
injection of contrast and saline or otherwise facilitate cardiovascular
procedures.
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 systems. The iLab® Ultrasound Imaging System, launched in
the U.S. in 2006, 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. In 2007, we
received approval for the sale of the iLab imaging system in Japan and
other international markets.
Embolic
Protection
Our
FilterWire EZ™ Embolic Protection System is a low profile filter designed to
capture embolic material
9
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., Europe and other
international markets 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.
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 biliary
strictures), 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 the first quarter
of 2008, we began integrating certain products used for non-vascular
intervention, previously part of our Oncology business, 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 January 2007, we completed the acquisition of EndoTex
Interventional Systems, Inc., and, in February 2007, launched the NexStent®
Carotid Stent System, a laser-cut, nitinol stent with a rolled sheet design that
enables one stent size to adapt to multiple diameters in tapered or non-tapered
vessel configurations.
In the
first quarter of 2008, we began integrating our Peripheral Interventions
business with our Interventional Cardiology business under a single management
structure to help create a more integrated business focused on interventional
specialists, while enhancing technology and operational
efficiencies.
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 treat
diseases of the neurovascular system. We market the GDC® Coils (Guglielmi
Detachable Coil) and Matrix® systems to treat brain aneurysms. 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.
Electrophysiology
We offer
medical devices for the diagnosis and treatment of cardiac arrhythmias (abnormal
heartbeats). Included in our product offerings are RF generators, intracardiac
ultrasound and steerable ablation catheters, as well as a line of diagnostic
catheters and associated accessories. Our leading brands include the
Blazer™
cardiac ablation catheter, and the Chilli II™ cooled ablation
catheter, the first bidirectional cooled-tip catheter available in the U.S. We
also offer a next-generation line of RF generators, the MAESTRO 3000® Cardiac
Ablation System. During 2008, we will integrate our Electrophysiology
business with our CRM business in order to serve better the needs of
electrophysiologists by creating a more efficient organization.
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Cardiac Rhythm Management
(CRM)
We offer
a variety of implantable devices that monitor the heart and deliver electrical
impulses to treat cardiac rhythm abnormalities, including tachycardia and
bradycardia. We also offer devices that treat heart failure by delivering
electrical impulses to help the heart to 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.
Our U.S.
CRM product offerings include:
|
·
|
VITALITY®2 ICD
systems;
|
|
·
|
ENDOTAK
RELIANCE® defibrillation leads;
|
|
·
|
CONTAK
RENEWAL® 3 RF CRT-D systems;
|
|
·
|
ACUITY™
Steerable left ventricular leads;
|
|
·
|
INSIGNIA® pacing
systems;
|
|
·
|
DEXTRUS™
pacing leads;
|
|
·
|
LATITUDE®
Patient Management System;
|
|
·
|
LIVIAN™
CRT-D (approved February 2008); and
|
|
·
|
CONFIENT™
ICD (approved February 2008).
|
Our
international CRM product offerings include:
|
·
|
ENDOTAK
RELIANCE® defibrillation leads;
|
|
·
|
CONTAK
RENEWAL® 3 RF CRT-D systems;
|
|
·
|
INSIGNIA®
pacing systems;
|
|
·
|
LIVIAN™
CRT-D; and
|
|
·
|
CONFIENT™
ICD.
|
The year
2007 was characterized by a re-engineering of how we design, build, test and
report on our CRM products. We also saw continued rapid adoption of
our LATITUDE® Patient Management System; we started the year with 11,500
patients enrolled on the LATITUDE System and finished 2007 with more than 80,000
patients enrolled. In November 2007, we announced the industry’s
first patient data integration between a CRM remote monitoring system and a
physician’s electronic medical record, using the LATITUDE System to allow
clinicians to access information from a patient’s ICD device and store this
information within the GE Centricity® Electronic Medical
Record (EMR) system in the form of lab results.
In 2007,
we launched two new lead systems that connect pulse generators to the heart –
the ACUITY™ Steerable left ventricular leads and the DEXTRUS™ pacing
leads. In April 2007, we received regulatory approval for and
launched in Japan our VITALITY® DR ICD system. In addition, in
October 2007, we received CE Mark approval for CONFIENT™, our next-generation
ICD product, and, in December 2007, we received European approval of LIVIAN™, our
next-generation CRT-D device. Further, in the first quarter of 2008, we received
CE Mark approval for our next-generation COGNISÔ CRT-D device and
our next-generation TELIGENÔ ICD system, as well
as U.S. FDA approval for CONFIENT and LIVIAN.
Endosurgery
In March
2007, we announced our intent to explore the benefits that could be gained from
operating our Endosurgery group as a separately traded public company that would
become a majority-owned subsidiary of Boston Scientific. In July 2007, we
completed this exploration and determined that the group will remain wholly
owned by Boston Scientific. The following are the components of our
Endosurgery business:
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
11
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 May 2007, we announced the worldwide launch
of our 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.
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
currently 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. In June 2007, we purchased Celsion Corporation’s ProlieveÒ Thermodilatation
System, a transurethral microwave thermotherapy system for the treatment of BPH,
which we had previously distributed for Celsion. 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, 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.
12
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.
Oncology
In 2007,
we marketed a broad line of products designed to treat, diagnose and palliate
various forms of benign and malignant tumors. Our suite of products includes
microcatheters, embolic agents and coils designed to restrict blood supply to
targeted sites, as well as radiofrequency-based therapeutic devices for the
ablation of various forms of soft tissue lesions (tumors). Also included in our
oncology portfolio during 2007 was a complete line of venous access products,
used for infusion therapy. In February 2008, we sold our Venous Access
franchise, as well as our Fluid Management business to Avista Capital Partners.
In the first quarter of 2008, we began integrating our remaining Oncology
franchises into other business units. We incorporated our Radiofrequency Tumor
Ablation franchise into our Endoscopy business; our Peripheral Embolization
franchise into our Neurovascular business; and our Non-Vascular Intervention
franchise into our Peripheral Interventions business, which is part of our
Cardiovascular business group.
Neuromodulation
Pain
Management
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 sources of other peripheral pain. In July 2007, we launched
our new Precision Plus™ SCS System, the world’s smallest rechargeable SCS
neuromodulation device for the treatment of chronic pain of the trunk, back and
limbs.
Cochlear
Implants
In 2007,
we developed and marketed in the U.S., Europe and Japan the HiResolution® 90K
Cochlear Implant System to restore hearing to the profoundly deaf. We also
offered our next-generation cochlear implant technology, the Harmony™
HiResolution Bionic Ear System. In January 2008, we sold a controlling interest
in our Auditory business and drug pump development program to the principal
former shareholders of Advanced Bionics Corporation. We retained and
continue to operate the Pain Management business and emerging indications
development program acquired with Advanced Bionics in 2004.
A
dedicated sales force of approximately 2,200 individuals in approximately 45
countries internationally, and over 3,700 individuals in the U.S. marketed our
products worldwide as of December 31, 2007. Sales in countries where we
have direct sales organizations accounted for approximately 94 percent of our
net sales during 2007. 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 a dedicated corporate
sales organization in the U.S. focused principally on selling to major buying
groups and integrated healthcare networks.
In 2007,
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
2007. However, large group purchasing organizations, hospital networks and other
13
buying
groups have become increasingly important to our business and represent a
substantial portion of our U.S. net sales.
We also
distribute certain products for third parties, including an introducer sheath
and certain guidewires, various graft materials, and pneumatic and laser
lithotripters for use in connection with urology and gynecology procedures.
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
Internationally,
during 2007, we operated through three business units divided among the
geographic regions of Europe, Asia Pacific and Inter-Continental. 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. Consistent with our geographic
focus, the Guidant CRM business became a business unit within each country
organization across Europe, Asia Pacific and Inter-Continental. 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.
International
sales accounted for approximately 41 percent of our net sales in 2007. Net
sales and operating income attributable to our 2007 geographic regions are
presented in Note P—Segment Reporting
to our 2007 consolidated financial statements included in Item 8 of this
Form 10-K.
We have
five international manufacturing facilities in Ireland, one in Costa Rica and
one in Puerto Rico. Presently, approximately 22 percent of our products sold
worldwide are manufactured at these facilities. We also maintain an
international research and development facility in Ireland, a training facility
in Tokyo, Japan, and a training and research and development center in Miyazaki,
Japan. Through April of 2008, we will continue to share a training facility with
Abbott in Brussels, Belgium, and will then move to our own international
training facility in Paris, France.
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 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® and
PROMUSÔ
drug-eluting coronary stent systems and our CRM products.
Quality Assurance
On
December 23, 2005, Guidant received an FDA warning letter citing certain
deficiencies with respect to its manufacturing quality systems and record
keeping procedures in its CRM facility in St. Paul, Minnesota. In
14
April
2007, following FDA reinspections of our CRM facilities, we resolved the warning
letter and all associated restrictions were removed.
On
January 26, 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. As stated in this FDA warning letter, the FDA may not grant our
requests for exportation certificates to foreign governments or approve PMA
applications for class III devices to which the quality control or current
good manufacturing practices deficiencies described in the letter are reasonably
related until the deficiencies have been corrected.
In order
to strengthen our corporate-wide quality controls, we established Project
Horizon, a corporate-wide cross-functional initiative to improve and harmonize
our overall quality processes and systems. As part of Project Horizon, we made
modifications to our management controls, process validation, corrections and
removals, distribution and product control, corrective and preventive actions,
and complaint management systems. Project Horizon resulted in the
reallocation of internal employee and management resources to quality
initiatives, as well as incremental spending, resulting in adjustments to
product launch schedules of certain products and the decision to discontinue
certain other product lines over time. Project Horizon ended as a formal program
on December 31, 2007 and we transferred all open projects to sustaining
organizations. We have since implemented the Quality Master Plan to drive
continuous improvement in compliance and quality performance. In addition, our
Board of Directors has created a Compliance and Quality Committee to monitor our
compliance and quality initiatives. 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.
We
believe we have identified solutions to the quality issues cited by the FDA, and
continue to make progress in transitioning our organization to implement those
solutions. We engaged a third party to audit our enhanced quality systems in
order to assess our corporate-wide compliance prior to reinspection by the FDA.
We completed substantially all of these third-party audits during 2007 and, in
February 2008, the FDA commenced its reinspection of certain of our facilities.
We believe that these reinspections represent a critical step toward the
resolution of the corporate warning letter.
In
addition, in August 2007, we received a warning letter from the FDA regarding
the conduct of clinical investigations associated with our abdominal aortic
aneurysm (AAA) program acquired from TriVascular, Inc. We are taking corrective
action and have made certain commitments to the FDA regarding the conduct of our
clinical trials. We terminated the TriVascular AAA program in 2006
and do not believe the recent warning letter will have an impact on the timing
of the resolution of our corporate warning letter.
We are
committed to providing high quality products to our customers. To meet this
commitment, we have implemented updated quality systems and concepts throughout
our organization. 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 quality system regulations of
the FDA with respect to products sold in the U.S. Many of our operations are
certified under ISO 9001, ISO 9002, ISO 13485, ISO 13488, EN 46001 and EN 46002
international quality system standards. ISO 9002 requires, among other items, an
implemented quality system that applies to component quality, supplier control
and manufacturing operations. In addition, ISO 9001 and EN 46001 require an
implemented quality system that applies to product design. These certifications
can be obtained only after a complete audit of a company’s quality system by an
independent outside auditor. Maintenance of these certifications requires that
these facilities undergo periodic re-examination.
We
maintain an ongoing 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
15
performance
improvement around these aspects. At present, nine 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
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.
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 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 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.
16
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.
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.
17
In 2007,
we were recognized for environmental stewardship, winning a Leadership in Energy
and Environmental Design (LEED) award for our new research and development
facility in Maple Grove, Minnesota. We also expect to receive LEED
awards for renovation projects that have been completed at our Marlborough and
Quincy facilities in Massachusetts.
In early
2007, we joined 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.
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 often 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. 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.
Proprietary Rights and Patent
Litigation
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
18
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 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.
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 unknown
events at the present time. We are substantially self-insured with respect to
general and 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 their
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 general, 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, 2007, we had approximately 27,500 employees, including
approximately 13,700 in operations; 1,900 in administration; 4,900 in clinical,
regulatory and research and development; and 7,000 in selling, marketing,
distribution and related administrative support. Of these employees, we employed
approximately 9,200 outside the U.S., approximately 5,500 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
headcount reduction plan, which will result in the elimination of approximately
2,300 positions worldwide. More than half of the employees impacted
by the head count reduction plan were notified in the fourth quarter of 2007,
and effectively ceased providing services to us; however due to certain
notification period requirements, many of the impacted employees did not
terminate employment with us until January 2008. As of January
31, 2008, as a result of these employment terminations and the divestiture of
certain of our businesses, we had approximately 24,500 employees.
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.
19
Available
Information
Copies of
our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and 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 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 Form 10-K.
Cautionary Statement for Purposes of
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995
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 27E 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 and head count reduction initiatives; timing of
regulatory approvals; our regulatory and quality compliance; expected research
and development efforts; product development and new product launches; our
market position and competitive changes in the marketplace for our products; the
effect of new accounting pronouncements; the outcome of matters before taxing
authorities; intellectual property and litigation matters;
our capital needs and expenditures; 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 potential acquisitions and divestitures. 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.
We do not
intend to update the forward-looking statements below or the risk factors
described in Item 1A under the heading “Risk Factors” even if new information
becomes available or other events occur in the future. We have identified these
forward-looking statements below and the risk factors described in Item 1A under
the heading “Risk Factors” in order to take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Certain
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.”
Coronary Stent
Business
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•
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Volatility
in the coronary stent market, competitive offerings and the timing of
receipt of regulatory approvals to market existing and anticipated
drug-eluting stent technology and other stent
platforms;
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•
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Our
ability to launch our next-generation drug-eluting stent system, the
TAXUS® Liberté® coronary stent system, in the U.S., subject to regulatory
approval, and to maintain or expand our worldwide market positions through
reinvestment in our two drug-eluting stent
programs;
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•
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Our
share of the worldwide drug-eluting stent market, the impact of concerns
relating to late stent thrombosis on the size of the coronary 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;
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20
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•
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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;
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•
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The
penetration rate of drug-eluting stent technology in the U.S. and
international markets;
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•
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Our
ability to leverage our position as an early entrant in the U.S.
drug-eluting stent market, to anticipate competitor products as they enter
the market and to respond to the challenges presented as additional
competitors enter the U.S. drug-eluting stent
market;
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•
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Changes
in FDA clinical trial and post-market surveillance requirements and the
associated impact on new product launch schedules and the cost of product
approval and compliance;
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•
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Our
ability to manage inventory levels, accounts receivable, gross margins and
operating expenses and to react effectively to worldwide economic and
political conditions;
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•
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Our
ability to retain key members of our cardiology sales force and other key
personnel; and
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•
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Our
ability to manage the mix of our PROMUSÔ stent system
revenue relative to our total drug-eluting stent revenue and to launch a
next-generation everolimus-eluting stent system with profit margins more
comparable to our TAXUS® stent system, and to maintain our overall
profitability as a percentage of
revenue.
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CRM
Business
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•
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Our
estimates for the worldwide CRM market, the recovery of the CRM market to
historical growth rates and our ability to increase CRM net
sales;
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•
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The
overall performance of, and referring physician, implanting physician and
patient confidence in, our and our competitors’ CRM products and
technologies, including our LATITUDE® Patient Management System and
next-generation pulse generator
platform;
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•
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The
results of CRM clinical trials undertaken by us, our competitors or other
third parties;
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Our
ability to launch various products utilizing our next-generation CRM pulse
generator platform in the U.S. over the next 12 to 24 months and to expand
our CRM market position through reinvestment in our CRM products and
technologies;
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•
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Our
ability to retain key members of our CRM sales force and other key
personnel;
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Competitive
offerings in the CRM market and the timing of receipt of regulatory
approvals to market existing and anticipated CRM products and
technologies;
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•
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Our
ability to continue to implement a direct sales model for our CRM products
in Japan; and
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•
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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.
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21
Litigation and Regulatory
Compliance
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•
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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;
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•
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Our
ability to minimize or avoid future FDA warning letters or field actions
relating to our products;
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•
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The
effect of our litigation; risk management practices, including
self-insurance; and compliance activities on our loss contingencies, legal
provision and cash flows;
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The
impact of our stockholder derivative and class action, patent, product
liability, contract and other litigation, governmental investigations and
legal proceedings;
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The
on-going, inherent risk of potential physician advisories or field actions
related to medical devices;
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•
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Costs
associated with our on-going compliance and quality activities and
sustaining organizations; and
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The
impact of increased pressure on the availability and rate of third-party
reimbursement for our products and procedures
worldwide.
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Innovation
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•
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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;
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•
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Our
ability to manage research and development and other operating expenses
consistent with our expected revenue
growth;
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•
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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 addition to these
technologies;
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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;
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Our
failure to succeed at, or our decision to discontinue, any of our growth
initiatives;
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•
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Our
ability to integrate the acquisitions and other alliances we have
consummated, including Guidant;
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•
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Our
decision to exercise, or not to exercise, options to purchase certain
companies with which we have alliances and our ability to fund with cash
or common stock these and other acquisitions, or to fund contingent
payments associated with these
alliances;
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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 certain of these
projects;
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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
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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.
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22
International
Markets
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•
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Dependency
on international net sales to achieve
growth;
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•
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Risks
associated with international operations, including compliance with local
legal and regulatory requirements as well as changes in reimbursement
practices and policies; and
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•
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The
potential effect of foreign currency fluctuations and interest rate
fluctuations on our net sales, expenses and resulting
margins.
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Liquidity
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•
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Our
ability to generate sufficient cash flow to fund operations, capital
expenditures, and strategic investments, as well as debt reduction over
the next twelve months and beyond;
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•
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Our
ability to maintain positive operating cash flow in 2008 and to generate
sufficient cash flow to effectively manage our debt levels and minimize
the impact of interest rate fluctuations on our earnings and cash
flows;
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•
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Our
ability to recover substantially all of our deferred tax
assets;
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Our
ability to access the public and private capital markets and to issue debt
or equity securities on terms reasonably acceptable to
us;
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Our
ability to regain investment-grade credit ratings and to remain in
compliance with our financial covenants;
and
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•
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Our
ability to implement, fund, and achieve sustainable cost improvement
measures, including our expense and head count reduction initiatives and
restructuring program, that will better align operating expenses with
expected revenue levels and reallocate resources to better support growth
initiatives.
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Other
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•
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Risks
associated with significant changes made or to be made to our
organizational structure, or to the membership of our executive
committee;
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Risks
associated with our acquisition of Guidant, including, among other things,
the indebtedness we have incurred and the integration costs and challenges
we will continue to face;
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•
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Our
ability to retain our key employees and avoid business disruption and
employee distraction as we execute our expense and head count reduction
initiatives; and
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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, in order to streamline our
operations and reduce our debt
obligations.
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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
23
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.
24
ITEM 1A. RISK
FACTORS
In addition to the other information
contained in this Form 10-K 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
Form 10-K. 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 revenue from the sale of drug-eluting coronary stent systems and cardiac
rhythm management (CRM) products. 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.
Drug-eluting
coronary stent revenues represented approximately 21 percent of our consolidated
net sales during the year ended December 31, 2007. Our U.S. TAXUS® sales
declined in 2007 relative to prior years, due in part to a decline in the U.S.
market size attributable to recent 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. In addition, a decline in the
overall percutaneous coronary intervention market contributed to the decline in
our TAXUS stent system sales in 2007. There can be no assurance that these
concerns will be alleviated in the near term or that drug-eluting stent
penetration rates or the size of the U.S. drug-eluting stent market will return
to previous levels. In 2007, our TAXUS stent system and Johnson & Johnson’s
CYPHER® stent system were the only two drug-eluting stents available in the U.S.
market. In February 2008, Medtronic received FDA approval for its Endeavor®
drug-eluting stent system. We expect our share of the drug-eluting
stent market, as well as unit prices, to continue to be adversely affected as
additional significant competitors enter the drug-eluting stent market,
including Abbott’s anticipated launch of the XIENCEÔ V
everolimus-eluting stent system in the first half of 2008. Abbott currently
sells its XIENCE V stent system in competition with us in certain international
markets.
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 PROMUSÔ 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, receipt of insufficient quantities of the PROMUS
stent system from Abbott, material nonacceptance 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.
During
2007 and 2006, the operating and financial performance of our CRM business was
adversely impacted by various ICD and pacemaker system field actions in the
industry and a corresponding reduction in CRM market growth rates. The worldwide
CRM market growth rate, including the growth rate of the U.S. ICD market,
declined during 2007; these growth levels are below those experienced in recent
years. The U.S. ICD market represents approximately 40 percent of the worldwide
CRM market. There can be no assurance that the CRM market will return to its
historical growth rate or that we will be able to regain CRM market share lost
due to contraction of the market or increase net sales in a timely manner, if at
all.
25
Because we derive a significant
amount of our revenues from our cardiovascular businesses, changes in market or
regulatory conditions that impact that business or our inability to develop
non-cardiovascular products, could have a material adverse effect on our
business, financial condition or results of
operations.
During
2007, we derived approximately 79 percent of our net sales from our
cardiovascular group, which includes our Interventional Cardiology, CRM and
Cardiovascular 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 increase CRM net
sales, it may adversely affect our business, financial condition or results of
operations. Revenue from drug-eluting coronary stent systems represented
approximately 24 percent of our consolidated net sales for 2007. If the
decline in U.S. drug-eluting stent market penetration rates attributable to
concerns regarding the perceived risk of late stent thrombosis following the use
of drug-eluting stents or the declines in overall percutaneous coronary
intervention volumes continue, there can be no assurance that the 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.
We may be unable to resolve issues
related to our FDA warning letters in a timely manner, which could delay the
production and sale of our products and have a material adverse impact on our
business, financial condition and results of
operations.
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. On
January 26, 2006, we 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. As stated in this FDA
warning letter, the FDA may not grant our requests for exportation certificates
to foreign governments or approve PMA applications for our class III
devices to which the quality control or current good manufacturing practices
deficiencies described in the letter are reasonably related until the
deficiencies have been corrected. If we are unable to resolve the issues raised
by the FDA in its warning letters to the satisfaction of the FDA on a timely
basis, we may not be able to launch our new class III devices as planned,
including the anticipated U.S. launch of our Taxus® Liberté® drug-eluting stent
system, which may weaken our competitive position in the drug-eluting stent
market.
In
addition, in August 2007, we received a warning letter from the FDA regarding
the conduct of clinical investigations associated with our TriVascular abdominal
aortic aneurysm (AAA) program. We are taking corrective action and have made
certain commitments to the FDA regarding the conduct of our clinical trials. We
terminated the TriVascular AAA program in 2006 and do not believe the recent
warning letter will have an impact on the timing of the resolution of our
corporate warning letter.
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 these 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.
26
We are subject to extensive medical
device regulation, which may impede or hinder the approval process for our
products and, in some cases, may not ultimately result in approval 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:
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•
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take
a significant period of time;
|
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•
|
require
the expenditure of substantial
resources;
|
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•
|
involve
rigorous pre-clinical and clinical testing, as well as increased
post-market surveillance
requirements;
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•
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require
changes to the products; and
|
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•
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result
in limitations on the indicated uses of the
products.
|
Countries
around the world have recently adopted more stringent regulatory requirements
that 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 from the FDA for new products or modifications
to existing products on a timely basis or that any FDA 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 condition or
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.
27
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, and 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.
We may not effectively be
able to protect our intellectual property rights, which could have an
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.
28
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
and Medtronic, Inc.
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 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 general and 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, regardless of their 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. Many of these alliances involve equity
investments and some give us the option to acquire the other company or assets
of the other company in the future. 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;
|
29
|
|
•
|
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;
|
|
•
|
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 expense reduction measures; our long-term expense reduction
programs may result in an increase in short-term expense; and our head count
reductions may lead to additional unintended
consequences.
As part
of our efforts to reduce expenses, improve our operating cost structure and
better position ourselves competitively, we are implementing several expense
reduction measures. These cost reduction initiatives include cost improvement
measures designed to better align operating expenses with expected revenue
levels, resource reallocations, head count reductions, the sale of certain
non-strategic assets and efforts to streamline our business, among other
actions. These measures 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 beyond our planned reduction in workforce or a
material decrease in employee morale or productivity could negatively affect our
business, financial condition and results of operations. In addition,
our head count reductions may subject us to the risk of litigation, which could
result in substantial cost. Moreover, our expense reduction programs
could result in current period charges and expenses that could 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 have decided to divest certain
non-strategic assets. These divestitures could pose significant risks
and may materially adversely affect our business, financial condition and
operating results.
We have
divested certain non-strategic assets, including our Auditory, Cardiac Surgery,
Vascular Surgery, Fluid Management and Venous Access businesses, and continue to
seek to identify other non-strategic assets for sale. Divestitures of
businesses may involve a number of risks, including the diversion of management
and employee attention, significant costs and expenses, the loss of customer
relationships, revenues and earnings associated with the divested business, and
the disruption of operations in the affected business. In addition,
divestitures involve significant post-closing separation activities through
transition service arrangements, which could involve the expenditure of
significant financial and employee resources and under which we will be reliant
on third parties for the provision of significant services. Our
inability to effectively consummate identified divestitures or manage the
post-separation transition arrangements could adversely affect our business,
financial condition and results of operations.
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 $8.189 billion at December 31, 2007, attributable in large part to
our acquisition of Guidant. We will be required 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 flows, and have decided to sell 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
30
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 maintain 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.
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.
During
the third quarter of 2007, our credit ratings from Standard & Poor’s Rating
Services and Fitch Ratings were downgraded to BB+, and our credit rating from
Moody’s Investor Service was downgraded to Ba1. All of these are below
investment grade ratings and the ratings outlook by all three rating agencies is
currently negative. These credit rating changes and our inability to
regain investment grade credit ratings could increase the cost of borrowing
funds in the future on terms reasonably acceptable to us.
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 TAXUS® Liberté® coronary stent system in the U.S. in the second half
of 2008, 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 CRM pulse generator platform. 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 from the FDA 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 from
the FDA, 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 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.
31
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 revenues. 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 revenues 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 41 percent of our net sales in
2007. 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, exchange 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. 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. Further, some emerging markets rely on the FDA’s Certificate for
Foreign Government (CFG) in lieu of their own regulatory approval requirements.
Our FDA corporate warning letter prevents our ability to obtain CFGs;
therefore, our ability to market new products or renew marketing approvals in
countries that rely on CFGs will continue to be impacted until the corporate
warning letter is revolved. 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.
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 medical
devices or denies coverage for those procedures could have a material adverse
effect on our business, financial condition or results of
operations.
32
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 light of Guidant’s product recalls, third-party
payors may seek claims and further recourse against us for the recalled
defibrillator and pacemaker systems for which Guidant had previously received
reimbursement.
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 initiated 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 may 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 any disruption of such sources of supply could adversely impact our
production efforts.
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, 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.
33
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.
Our world
headquarters are located in Natick, Massachusetts. We have regional headquarters
located in Tokyo, Japan and Paris, France. As of December 31, 2007,
our manufacturing, research, distribution and other key facilities totaled more
than 10 million square feet, of which more than seven million square feet were
owned by us and the balance under lease arrangements. As of December 31,
2007, our principal manufacturing and technology centers were located in
Massachusetts, Indiana, Minnesota, New Jersey, Florida, California, New York,
Utah, Washington, Puerto Rico, Ireland, Costa Rica and Japan, and our principal
distribution centers were located in Massachusetts, The Netherlands and Japan.
As of December 31, 2007, we maintained 37 manufacturing, distribution and
technology centers, 26 in the U.S., one in Puerto Rico, five in Ireland, one in
Costa Rica, two in The Netherlands and two in Japan. Many of these facilities
produce and manufacture products for more than one of our divisions and include
research facilities. In addition, we share a training facility in Brussels,
Belgium with Abbott and are currently building our own international training
institute in Paris, France, which is scheduled to open in the first half of
2008. The following is a summary of our facilities (in
square feet):
|
|
Total
Space
|
|
Owned
|
|
Leased
|
|
|
Domestic
|
|
8,006,000
|
|
5,912,000
|
|
2,094,000
|
|
Foreign
|
|
2,769,000
|
|
1,386,000
|
|
1,383,000
|
|
Total
|
|
10,775,000
|
|
7,298,000
|
|
3,477,000
|
|
|
|
|
|
|
|
|
See Note L—Commitments and
Contingencies to our 2007 consolidated financial statements included in
Item 8 of this Form 10-K.
None.
34
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
|
|||||||
|
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
|
||||||
|
2006
|
||||||||
|
First
Quarter
|
$ |
26.48
|
$ |
20.90
|
||||
|
Second
Quarter
|
23.30
|
16.65
|
||||||
|
Third
Quarter
|
17.75
|
14.77
|
||||||
|
Fourth
Quarter
|
17.18
|
14.65
|
||||||
We have
not paid a cash dividend during the past two years. 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, 2008, there were 15,182 record holders of our common
stock.
The
closing price of our common stock on February 20, 2008 was
$12.61.
We did
not repurchase any of our common stock in 2007 or 2006. We repurchased
approximately 25 million shares of our common stock at an aggregate cost of
$734 million in 2005. There are approximately 37 million remaining
shares authorized for purchase under our share repurchase program. We currently
do not anticipate material repurchases in 2008.
35
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, 2003, and that
all dividends were reinvested.
36
ITEM
6. SELECTED FINANCIAL
DATA
(in
millions, except per share data)
Operating Data
|
Year Ended December
31,
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Net
sales
|
$ |
8,357
|
$ |
7,821
|
$ |
6,283
|
$ |
5,624
|
$ |
3,476
|
||||||||||
|
Gross
profit
|
6,015
|
5,614
|
4,897
|
4,332
|
2,515
|
|||||||||||||||
|
Selling,
general and administrative expenses
|
2,909
|
2,675
|
1,814
|
1,742
|
1,171
|
|||||||||||||||
|
Research
and development expenses
|
1,091
|
1,008
|
680
|
569
|
452
|
|||||||||||||||
|
Royalty
expense
|
202
|
231
|
227
|
195
|
54
|
|||||||||||||||
|
Amortization
expense
|
641
|
530
|
152
|
112
|
89
|
|||||||||||||||
|
Purchased
research and development
|
85
|
4,119
|
276
|
65
|
37
|
|||||||||||||||
|
Restructuring
charges
|
176
|
|||||||||||||||||||
|
Litigation-related
charges
|
365
|
780
|
75
|
15
|
||||||||||||||||
|
Loss
on assets held for sale
|
560
|
|||||||||||||||||||
|
Total
operating expenses
|
6,029
|
8,563
|
3,929
|
2,758
|
1,818
|
|||||||||||||||
|
Operating
(loss) income
|
(14 | ) | (2,949 | ) |
968
|
1,574
|
697
|
|||||||||||||
|
(Loss)
income before income taxes
|
(569 | ) | (3,535 | ) |
891
|
1,494
|
643
|
|||||||||||||
|
Net
(loss) income
|
(495 | ) | (3,577 | ) |
628
|
1,062
|
472
|
|||||||||||||
|
Net
(loss) income per common share
|
||||||||||||||||||||
|
Basic
|
$ | (0.33 | ) | $ | (2.81 | ) | $ |
0.76
|
$ |
1.27
|
$ |
0.57
|
||||||||
|
Assuming
dilution
|
$ | (0.33 | ) | $ | (2.81 | ) | $ |
0.75
|
$ |
1.24
|
$ |
0.56
|
||||||||
|
Weighted-average
shares outstanding — basic
|
1,486.9
|
1,273.7
|
825.8
|
838.2
|
821.0
|
|||||||||||||||
|
Weighted-average
shares outstanding — assuming dilution
|
1,486.9
|
1,273.7
|
837.6
|
857.7
|
845.4
|
|||||||||||||||
|
Balance Sheet
Data
|
||||||||||||||||||||
|
As of December
31,
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Cash,
cash equivalents and marketable securities
|
$ |
1,452
|
$ |
1,668
|
$ |
848
|
$ |
1,640
|
$ |
752
|
||||||||||
|
Working
capital*
|
2,671
|
3,399
|
1,152
|
684
|
487
|
|||||||||||||||
|
Total
assets
|
31,197
|
30,882
|
8,196
|
8,170
|
5,699
|
|||||||||||||||
|
Borrowings
(long-term and short-term)
|
8,189
|
8,902
|
2,020
|
2,367
|
1,725
|
|||||||||||||||
|
Stockholders’
equity
|
15,097
|
15,298
|
4,282
|
4,025
|
2,862
|
|||||||||||||||
|
Book
value per common share
|
$ |
10.12
|
$ |
10.37
|
$ |
5.22
|
$ |
4.82
|
$ |
3.46
|
||||||||||
|
*
|
In
2007, certain assets and liabilities were reclassified to “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 certain of our businesses. We have reclassified 2006
balances for comparative purposes, both on the face of the consolidated
balance sheets, and in the working capital metric above. We have not
restated working capital for 2005 or prior periods, 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.
|
We paid a
two-for-one stock split in the form of a 100 percent stock dividend on November
5, 2003. All information above pertaining to 2003 above has been restated to
reflect the stock split.
37
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Boston
Scientific Corporation is a worldwide developer, manufacturer and marketer of
medical devices that are used in a broad range of interventional medical
specialties. Our mission is to improve the quality of patient care and the
productivity of healthcare delivery through the development and advocacy of
less-invasive medical devices and procedures. We accomplish this mission through
the continuing refinement of existing products and procedures and the
investigation and development of new technologies that can reduce risk, trauma,
cost, procedure time and the need for aftercare. Our approach to innovation
combines internally developed products and technologies with those we obtain
externally through our acquisitions and alliances. The growth and success of our
organization is dependent upon the shared values of our people. 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
management’s discussion and analysis (MD&A) begins with an executive summary
that outlines financial highlights of 2007 and identifies key trends that
impacted operating results during the year. We supplement this summary with an
in-depth look at the major issues we believe are most relevant to our current
and future prospects. We follow this discussion with an examination of the
material changes in our operating results for 2007 as compared to 2006 and for
2006 as compared to 2005. We then provide an examination of liquidity, focusing
primarily on material changes in our operating, investing and financing cash
flows, as depicted in our consolidated statements of cash flows included in Item
8 of this Form 10-K, and the trends underlying these changes. Finally, the
MD&A provides information on our critical accounting policies.
On April
21, 2006, we consummated our acquisition of Guidant Corporation. With this
acquisition, we have become a major provider in the $10 billion global Cardiac
Rhythm Management (CRM) market, enhancing our overall competitive position and
long-term growth potential, and further diversifying our product portfolio. The
acquisition has established us as one of the world’s largest cardiovascular
device companies and a global leader in microelectronic therapies. As a result
of the acquisition, we now manufacture a variety of implantable devices that
monitor the heart and deliver electricity to treat cardiac abnormalities,
including tachycardia (abnormally fast or chaotic heart rhythms), bradycardia
(slow or irregular heart rhythms), and heart failure (the heart’s inability to
pump effectively). These devices include implantable cardioverter defibrillator
(ICD) and pacemaker systems. In addition, we acquired Guidant’s Cardiac Surgery
business, which produces cardiac surgery systems to perform cardiac surgical
ablation, endoscopic vessel harvesting and clampless beating-heart bypass
surgery. We divested the Cardiac Surgery business in a separate transaction in
2008; see Strategic
Initiatives within the Executive Summary that
follows for more information on this and our other business divestitures. We
also now share certain drug-eluting technology with Abbott Laboratories, which
gives us access to a second drug-eluting stent program, and complements our
TAXUS® stent system
program. See Note C
- Acquisitions to our
2007 consolidated financial statements included in Item 8 of this
Form 10-K for further details on the Guidant acquisition and Abbott
transaction.
Our
operating results for the year ended December 31, 2007 include a full year of
results of our CRM and Cardiac Surgery businesses that we acquired from Guidant.
Our operating results for the year ended December 31, 2006 include the results
of the CRM and Cardiac Surgery businesses beginning on the date of acquisition.
We have included supplemental pro forma financial information in Note C – Acquisitions
to our 2007 consolidated financial statements included in Item 8 of this
Form 10-K, which gives effect to the acquisition as though it had occurred
at the beginning of 2006 and 2005.
38
Executive Summary
Financial Highlights and
Trends
Our net
sales in 2007 increased to $8.357 billion from $7.821 billion in 2006,
an increase of $536 million or 7 percent. Our reported net loss for 2007 was
$495 million, or $0.33 per diluted share, on approximately 1.5 billion
weighted-average shares outstanding, as compared to a net loss for 2006 of
$3.577 billion, or $2.81 per diluted share, on approximately 1.3 billion
weighted-average shares outstanding. Our reported results included acquisition-,
divestiture-, litigation- and restructuring-related charges2 (after tax) of $1.092 billion, or $0.73 per
diluted share in 2007, as compared to acquisition-related charges (after tax) of
$4.566 billion, or $3.58 per diluted share, in 2006. Cash provided by
operating activities was $934 million in 2007 as compared to $1.845 billion
in 2006.
The
increase in our net sales for 2007 was driven primarily by our 2006 acquisition
of Guidant. Worldwide sales of our CRM business increased to $2.124 billion from
$1.371 billion in 2006, an increase of $753 million or 55 percent, on an as
reported basis. On a pro forma basis, including the acquired CRM business for
the entire year in 2006, CRM revenue increased $98 million, or five percent. The
increase was a result of growth in the size of the worldwide markets for both
ICD and pacemaker systems. We estimate that the size of the combined worldwide
CRM market increased six percent in 2007, as compared to 2006.
Partially
offsetting increases in sales of our CRM products was a decrease in our coronary
stent system sales. Worldwide sales of our coronary stent systems in 2007 were
$2.027 billion, as compared to $2.506 billion in 2006, a decrease of $479
million or 19 percent. The deterioration was driven by decreases in sales of our
drug-eluting coronary stent systems, attributable primarily to a decline in the
worldwide drug-eluting stent market size. Uncertainty regarding the perceived
risk of late stent thrombosis3 following the use of drug-eluting stents has
resulted in lower procedural volumes and contributed to the overall decline.
During 2007, we successfully launched our TAXUS® Express2Ô drug-eluting
coronary stent system in Japan, and have achieved a leadership position within
the worldwide drug-eluting stent market.
During
2007, worldwide sales from our Endosurgery businesses increased to $1.479
billion from $1.346 billion in 2006, an increase of 10 percent. Further,
our Neuromodulation business generated $317 million in net sales during
2007, as compared to $234 million in 2006, an increase of 36
percent.
At
December 31, 2007, we had total debt of $8.189 billion, cash and cash
equivalents of $1.452 billion and working capital of $2.671 billion. During
2007, we prepaid $750 million of debt and prepaid an additional $200 million in
January 2008. We expect to make a further payment of $425 million before the end
of the first quarter of 2008 and expect to continue to use a significant portion
of our future operating cash flows over the next several years to reduce our
debt obligations.
Strategic
Initiatives
In 2007,
we announced several new initiatives designed to enhance short- and long-term
shareholder value,
|
2
|
In
2007, these charges (after-tax) include: a $553 million charge associated
with the write-down of goodwill in connection with business divestitures;
a $294 million charge associated with on-going patent litigation; $131
million of restructuring-related charges associated with our expense and
head count reduction initiatives; an $84 million charge for in-process
research and development costs; and $30 million in charges related to our
2006 acquisition of Guidant. In 2006, these charges included: $4.477
billion in purchase price adjustments related to Guidant, associated
primarily with a $4.169 billion charge for in-process research and
development costs and a $169 million charge for the step-up value of
Guidant inventory sold; $143 million in other costs related primarily to
the Guidant acquisition; and a $54 million 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.
|
39
including
the restructuring of several of our businesses and the sale of five
non-strategic businesses, as well as significant expense and head count
reductions. Our goal is to better align expenses with revenues, while preserving
our ability to make needed investments in quality, research and development
(R&D), capital and our people that are essential to our long-term success.
We expect these initiatives to help provide better focus on our core businesses
and priorities, which will strengthen Boston Scientific for the future and
position us for increased, sustainable and profitable sales growth. Our plan is
to reduce R&D and selling, general and administrative (SG&A) expenses by
$475 million to $525 million against a $4.1 billion baseline, which represented
our estimated annual R&D and SG&A expenses at the time we committed to
these initiatives in 2007. This range represents the annualized run rate amount
of reductions we expect to achieve as we exit 2008, as the implementation of
these initiatives will take place throughout the year; however, we expect to
realize the majority of these savings in 2008. In addition, we expect to reduce
our R&D and SG&A expenses by an additional $25 million to $50 million in
2009.
Restructuring
In
October 2007, our Board of Directors approved an expense and head count
reduction plan, which we expect will result 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 a part of our
initiatives to enhance short- and long-term shareholder value. We initiated
activities under the plan in the fourth quarter of 2007 and expect to complete
substantially all of these activities worldwide by the end of
2008. As of December 31, 2007, we had completed more than half of the
anticipated head count reductions. The plan also provides for 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. We expect that the execution of this plan will result in total
costs of approximately $425 million to $450 million. We recorded $205 million of
these costs in the fourth quarter of 2007, and expect to record the remainder
throughout 2008 and into 2009. We are recording these costs primarily as
restructuring charges, with a portion recorded through other lines within our
consolidated statements of operations. Refer to Results of Operations and
Note G - Restructuring
to our 2007 consolidated financial statements included in Item 8 of this Form
10-K for more information on these initiatives.
Divestitures
During
2007, we determined that our Auditory, Vascular Surgery, Cardiac Surgery, Venous
Access and Fluid Management businesses were no longer strategic to our ongoing
operations. Therefore, we initiated the process of selling these businesses in
2007, and completed the sale of these businesses in 2008, as discussed below. We
received gross proceeds of approximately $1.3 billion from these divestitures,
and estimate future tax payments of approximately $350 million associated with
these transactions. The combined 2007 revenues generated from these businesses
was $553 million, or seven percent of our net sales. Approximately 2,000
positions were eliminated in connection with our business
divestitures.
In
January 2008, we completed the sale of a controlling interest in our Auditory
business and drug pump development program to entities affiliated with the
principal former shareholders of Advanced Bionics Corporation for an aggregate
payment of $150 million. 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
January 2008, we completed the sale of our Cardiac Surgery and Vascular Surgery
businesses for $750 million in cash. In connection with the sale, we recorded a
loss of $193 million (pre-tax) in 2007, attributable primarily to the write-down
of goodwill. In addition, we expect to record a tax expense of approximately $50
million in the first quarter of 2008 in connection with the closing of the
transaction.
In
February 2008, we completed the sale of our Fluid Management business and our
Venous Access franchise, previously part of our Oncology business, for $425
million in cash. We expect to record a pre-tax gain of approximately
$230 million during the first quarter of 2008 associated with this
transaction.
40
Refer to
Note E – Assets Held for Sale
to our 2007 consolidated financial statements included in Item 8 of this
Form 10-K for more information regarding these transactions.
In March
2007, we announced our intent to explore the benefits that could be gained from
operating our Endosurgery group as a separately traded public company that would
become a majority-owned subsidiary of Boston Scientific. In July 2007, we
completed our exploration of an IPO of a minority interest in our Endosurgery
group and determined that the group will remain wholly owned by Boston
Scientific.
Monetization of
Investments
During
the second quarter of 2007, we announced our decision to monetize the majority
of our investment portfolio in order to eliminate investments determined to be
non-strategic. Following this decision, in 2007, we monetized several of our
investments in, and notes receivable from, certain publicly traded and privately
held companies. We received total gross proceeds of $243 million in 2007 from
the sale of investments and collections of notes receivable. We intend to
monetize the rest of our non-strategic portfolio investments over the next
several quarters. The total carrying value of our portfolio of equity
investments and notes receivable was $378 million as of December 31,
2007. We believe that the fair value of our individual investments
and notes receivable equals or exceeds their carrying values as of December 31,
2007; however, we could recognize losses as we monetize these investments
depending on the market conditions for these investments at the time of sale and
the net proceeds we ultimately receive. Refer to our Other, net discussion and
Note F – Investments and Notes
Receivable to our 2007 consolidated financial statements included in Item
8 of this Form 10-K for more information on our investment portfolio and
activity.
FDA Warning
Letters
In
December 2005, Guidant received an FDA warning letter citing certain
deficiencies with respect to its manufacturing quality systems and
record-keeping procedures in its CRM facility in St. Paul, Minnesota. In April
2007, following FDA reinspections of our CRM facilities, we resolved the warning
letter and all associated restrictions were removed.
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. In order to strengthen our corporate-wide quality controls, we
launched Project Horizon, which has resulted in significant incremental spending
on and the reallocation of internal employee and management resources to quality
initiatives. It has also resulted in adjustments to the launch schedules of
certain products and the decision to discontinue certain other product lines
over time.
We
believe we have identified solutions to the quality system issues cited by the
FDA and continue to make progress in transitioning our organization to implement
those solutions. We engaged a third party to audit our enhanced quality systems
in order to assess our corporate-wide compliance prior to reinspection by the
FDA. We completed substantially all of these third-party audits during 2007 and,
in February 2008, the FDA commenced its reinspection of certain of our
facilities. We believe that these reinspections represent a critical step toward
the resolution of the corporate warning letter.
In
addition, in August 2007, we received a warning letter from the FDA regarding
the conduct of clinical investigations associated with our TriVascular AAA
program. We are taking corrective action and have made certain commitments to
the FDA regarding the conduct of our clinical trials. We terminated the
TriVascular AAA program in 2006 and do not believe this warning letter will have
an impact on the timing of the resolution of our corporate warning
letter.
There can
be no assurances regarding the length of time or cost it will take us to resolve
these quality issues to our satisfaction and to the satisfaction of the
FDA. Our inability to resolve these quality issues in a timely
41
manner
may further delay product launch schedules, including the anticipated U.S.
launch of our next-generation drug-eluting stent system, the TAXUS® Liberté®,
which may weaken our competitive position in the market. If our remedial actions
are not satisfactory to the FDA, we may need to devote additional financial and
human resources to our efforts, and the FDA may take further regulatory
actions.
Outlook
Coronary Stent
Business
Coronary
stent revenue represented approximately 24 percent of our consolidated net sales
for 2007, as compared to 32 percent in 2006, as a result of our acquisition of
Guidant, which significantly expanded our product offerings, as well as a
decline in our coronary stent system sales in 2007. We estimate that the
worldwide coronary stent market approximated $5.0 billion in 2007, as
compared to approximately $6.0 billion in 2006, and estimate that drug-eluting
stents represented approximately 80 percent of the dollar value of
worldwide coronary stent market sales in 2007, as compared to 90 percent in
2006. Coronary stent market size is driven primarily by the number of
percutaneous coronary intervention (PCI) procedures performed; 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). Uncertainty regarding the efficacy
of drug-eluting stents, as well as the increased perceived risk of late stent
thrombosis following the use of drug-eluting stents, has contributed to a
decline in the worldwide drug-eluting stent market size. However, recent data
addressing this risk and supporting the safety of drug-eluting stent systems
could positively affect the size of the drug-eluting stent market, as referring
cardiologists regain confidence in this technology.
In
October 2006, we received CE mark approval to begin marketing our PROMUSÔ everolimus-eluting
coronary stent system, which is a private-labeled XIENCEÔ V drug-eluting
stent system supplied to us by Abbott. Under the terms of our supply arrangement
with Abbott, the profit margin of a PROMUS stent system is significantly lower
than that of our TAXUS stent system. Therefore, an increase in PROMUS stent
system revenue relative to our total drug-eluting stent revenue could have
a negative impact on our profit margins. We will incur incremental costs and
expend incremental resources in order to develop and commercialize additional
products utilizing everolimus-eluting stent technology and to support an
internally developed and manufactured everolimus-eluting stent system in the
future. We expect that this stent system will have profit margins more
comparable to our TAXUS stent system. See the Purchased Research and
Development section for further discussion.
In June
2007, Abbott submitted the final module of a pre-market approval (PMA)
application to the FDA seeking approval in the U.S. for both the XIENCE V and
PROMUS stent systems. In November 2007, the FDA advisory panel reviewing
Abbott’s PMA submission voted to recommend the stent systems for
approval. Following FDA approval, which Abbott is expecting in the
first half of 2008, we plan to launch the PROMUS stent system in the
U.S.
The
following are the components of our worldwide coronary stent system
sales:
|
(in
millions)
|
Year Ended
December 31,
2007
|
Year Ended
December 31,
2006
|
||||||||||||||||||||||
|
U.S.
|
International
|
Total
|
U.S.
|
International
|
Total
|
|||||||||||||||||||
|
Drug-eluting
|
$ | 1,006 | $ | 782 | $ | 1,788 | $ | 1,561 | $ | 797 | $ | 2,358 | ||||||||||||
|
Bare-metal
|
104 | 135 | 239 | 52 | 96 | 148 | ||||||||||||||||||
| $ | 1,110 | $ | 917 | $ | 2,027 | $ | 1,613 | $ | 893 | $ | 2,506 | |||||||||||||
During
2007, sales of our TAXUS® stent system in the U.S. declined $555 million or 36
percent, as compared to the prior year, due to a decline in market size.
Decreases in drug-eluting stent penetration rates, as well as
42
decreases
in PCI procedural volume contributed to an overall reduction in the U.S.
coronary stent market size. Drug-eluting stent penetration rates were 62 percent
exiting 2007, as compared to 73 percent exiting 2006. Penetration rates
decreased throughout 2007, but appear to have stabilized at approximately 62
percent during the fourth quarter of 2007, which was largely consistent with the
third quarter average penetration rate of 63 percent. We estimate that the
number of PCI procedures performed in the U.S. in 2007 decreased eight percent,
as compared to 2006. Despite the decrease in the size of the U.S. drug-eluting
stent market, we remain the market leader with 55 percent market share for 2007.
However, we expect that there will be increased pressure on our U.S.
drug-eluting stent system sales due to new competitive launches. Until February
2008, the TAXUS stent system was one of only two drug-eluting stent products in
the U.S. market. In February, however, an additional competitor entered the U.S.
drug-eluting stent market. Our share of this market, as well as unit prices, are
expected to be negatively impacted as additional competitors enter the U.S.
drug-eluting stent market, including Abbott’s anticipated launch of XIENCEÔ V in the first half
of 2008.
During
2007, our international drug-eluting stent system net sales decreased $15
million, or two percent, as compared to 2006, due primarily to an overall
decline in the size of the international drug-eluting stent market. Sales of our
drug-eluting stent systems in our Europe and Inter-Continental markets were
negatively impacted by declines in market size as a result of decreases in
drug-eluting stent penetration rates and decreased PCI procedural volume, as
compared to 2006, driven primarily by continued concerns regarding safety and
efficacy. This decline was offset partially by the successful launch of our
TAXUS® Express2Ô drug-eluting
coronary stent system in Japan in May 2007.
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 this
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. In addition, the FDA has informed stent manufacturers of new
requirements for clinical trial data for PMA applications and post-market
surveillance studies for drug-eluting stent products, which could affect our new
product launch schedules and increase the cost of product approval and
compliance.
We
believe that we can maintain our leadership position within the worldwide
drug-eluting stent market for a variety of reasons, including:
|
·
|
the
broad and consistent long-term results of our TAXUS clinical trials,
including up to five years of clinical follow
up;
|
|
·
|
the
performance benefits of our current and future
technology;
|
|
·
|
the
strength of our pipeline of drug-eluting stent products, including
opportunities to expand indications for use through FDA review of existing
and additional randomized trial data in extended use
subsets;
|
|
·
|
our
overall position in the worldwide interventional medicine market and our
experienced interventional cardiology sales
force;
|
|
·
|
our
sales, clinical, marketing and manufacturing capabilities;
and
|
|
·
|
our two
drug-eluting stent platform strategy, including our TAXUS®
paclitaxel-eluting and our PROMUS™ everolimus-eluting coronary stent
systems.
|
However,
a further decline in revenues from our drug-eluting stent systems could continue
to 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:
43
|
·
|
the
entry of additional competitors into the market, including the recent
approval of a competitive product in the
U.S.;
|
|
·
|
physician
and patient confidence in our technology and attitudes toward drug-eluting
stents, including expected abatement of prior concerns regarding the risk
of late stent thrombosis;
|
|
·
|
drug-eluting
stent penetration rates, the overall number of PCI procedures performed,
average number of stents used per procedure, and declines in average
selling prices of drug-eluting stent
systems;
|
|
·
|
variations
in clinical results or perceived product performance of our or our
competitors’ products;
|
|
·
|
delayed
or limited regulatory approvals and unfavorable reimbursement
policies;
|
|
·
|
the
outcomes of intellectual property
litigation;
|
|
·
|
our
ability to launch next-generation products and technology features,
including our TAXUS® Liberté® paclitaxel-eluting
coronary stent
system and our PROMUSÔ
everolimus-eluting coronary stent system, in the U.S.
market;
|
|
·
|
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.
|
CRM
Business
CRM
revenue represented approximately 25 percent of our consolidated net sales for
2007, as compared to approximately 18 percent in 2006, or 24 percent on a pro
forma basis, including the CRM business for the entire year in 2006. We estimate
that the worldwide CRM market approximated $10.0 billion in 2007, as compared to
approximately $9.5 billion in 2006, and estimate that U.S. ICD system sales
represented approximately 40 percent of the worldwide CRM market in 2007, as it
did in 2006.
The
following are the components of our worldwide CRM sales:
|
(in
millions)
|
Year Ended
December 31,
2007
|
Year Ended
December 31,
2006
|
||||||||||||||||||||||
|
U.S.
|
International
|
Total
|
U.S.
|
International
|
Total
|
|||||||||||||||||||
|
ICD
systems
|
$ | 1,053 | $ | 489 | $ | 1,542 | $ | 1,053 | $ | 420 | $ | 1,473 | ||||||||||||
|
Pacemaker
systems
|
318 | 264 | 582 | 305 | 248 | 553 | ||||||||||||||||||
| $ | 1,371 | $ | 753 | $ | 2,124 | $ | 1,358 | $ | 668 | $ | 2,026 | |||||||||||||
|
Less:
Jan 1 - Apr 20 net sales
|
655 | |||||||||||||||||||||||
|
CRM
sales, as reported
|
$ | 1,371 | ||||||||||||||||||||||
On a pro
forma basis, our U.S. sales of ICD systems for 2007 remained flat with 2006,
with both the market size and our share of the market substantially unchanged.
Our international ICD system sales increased 16 percent in 2007, as compared to
2006, on a pro forma basis, due primarily to an increase in market size. We also
experienced year-over-year growth, on a pro forma basis, in pacemaker system
sales in both the U.S. and
44
international
markets. However, a field action initiated in 2007 by one of our competitors may
have an adverse impact on the overall size of the CRM market. In addition, our
net sales and market share in Japan were negatively impacted by a decision made
in 2007 by our CRM distributor in that country to no longer distribute our CRM
products. As a result, we are currently moving to a direct sales model in Japan
and, until we fully implement this model, our net sales and market share in
Japan may be negatively impacted.
Worldwide
CRM market growth rates in 2007 and 2006, including the U.S. ICD market, were
below those experienced in prior years, resulting primarily from previous field
actions in the industry and from a lack of new indications for use. While we
expect that growth rates in the worldwide CRM market will improve over time,
there can be no assurance that these markets will return to their
historical growth rates or that we will be able to increase net sales in a
timely manner, if at all. The most significant variables that may impact the
size of the CRM market and our position within that market include:
|
·
|
our
ability to launch next-generation products and technology features in a
timely manner;
|
|
·
|
our
ability to re-establish 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;
|
|
·
|
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;
|
|
·
|
declines
in average selling prices and the overall number of procedures performed;
and
|
|
·
|
the
outcome of legal proceedings related to our CRM
business.
|
In April
2007, following FDA reinspections of our CRM facilities, we resolved the warning
letter issued to Guidant in December 2005 and all associated restrictions
were removed. We believe the FDA’s decision is a crucial element in our ongoing
efforts to rebuild trust and restore confidence in our CRM product offerings,
and has allowed us to resume our new product cadence. Following the resolution
of the warning letter, we received various FDA approvals that had been pending
and have since launched several new CRM products.
Intellectual Property
Litigation
There
continues to be significant intellectual property litigation in the coronary
stent market. We are currently involved in a number of legal proceedings with
our existing competitors, including Johnson & Johnson and Medtronic, Inc.
There can be no assurance that an adverse outcome in one or more of these
proceedings would not impact our ability to meet our objectives in the coronary
stent market. See Note L -
Commitments and Contingencies to our 2007 consolidated financial
statements included in Item 8 of this Form 10-K for a description of
these legal proceedings.
Innovation
Our
approach to innovation combines internally developed products and technologies
with those we obtain
45
externally
through acquisitions and alliances. Our research and development program is
focused largely on the development of next-generation and novel technology
offerings across multiple programs and divisions. We now have access to a second
drug-eluting stent program, which complements our existing TAXUS® stent system
program. We expect to continue to invest in our paclitaxel drug-eluting stent
program, along with our internally developed and manufactured everolimus-eluting
stent program, to continue to sustain our leadership position in the worldwide
drug-eluting stent market. During 2008, we expect to incur incremental capital
expenditures and research and development expenses as a result of our two
drug-eluting stent programs. We successfully launched our next-generation
drug-eluting stent product, the TAXUS® Liberté® stent system, during 2005 in our
Europe and Inter-Continental markets, and expect to launch the product in the
U.S. in the second half of 2008, subject to regulatory approval. In addition, we
expect to continue to invest in our CRM technologies, including our LATITUDE®
Patient Management System, a technology that enables physicians to monitor
device performance remotely while patients remain in their homes. In October
2006, the FDA approved expansion of our LATITUDE system to be used for remote
monitoring in certain existing ICD systems and cardiac resynchronization
defibrillator (CRT-D) systems. In addition, we will continue to invest in our
next-generation pulse generator platform acquired with Guidant. We recently
received CE Mark approval for our next-generation COGNIS™ CRT-D and TELIGEN™ ICD
devices utilizing this technology and expect to launch these products in the
U.S. in the second half of 2008, subject to regulatory approval. We
also expect to invest selectively in areas outside of drug-eluting stent and CRM
technologies. 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
acquisitions are intended to expand further our ability to offer our customers
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, including companies with
whom we currently have alliances or options to purchase, or the fulfillment of
our contingent consideration obligations may be dilutive to our earnings and may
require additional debt or equity financing, depending on their size and nature.
Further, in connection with these acquisitions and other alliances, we have
acquired numerous in-process research and development projects. As we continue
to undertake strategic growth initiatives, it is reasonable to assume that we
will acquire additional in-process research and development
projects.
We have
entered a significant number of alliances with both privately held and publicly
traded companies. Many of these alliances involve equity investments and some
give us the option to acquire the other company or its assets in the future. We
enter these alliances to broaden our product technology portfolio and to
strengthen and expand our reach into existing and new markets. During 2007, we
began the process of monetizing certain investments and alliances no longer
determined to be strategic (see the Strategic Initiatives
section). 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 alliances.
While we
believe that the size of drug-eluting stent and CRM markets will increase above
existing levels, there can be no assurance as to the timing or extent of this
recovery. In 2008, we will continue to examine and, if necessary, reprioritize
our internal research and development project portfolio and our external
investment portfolio based on expectations of future market growth. This
reprioritization may result in our decision to sell, discontinue, write down, or
otherwise reduce the funding of certain projects, operations, investments
or assets. Any proceeds from sales, or any increases in operating cash flows,
resulting from these reprioritization activities may be used to reduce debt or
may be reinvested in other research and development projects or other
operational initiatives.
46
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 often 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. There is no way of
predicting the outcome of these reimbursement decisions, nor their impact on our
operating results.
International
Markets
International
markets, including Japan, are also affected by economic pressure to contain
reimbursement levels and healthcare costs. 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. 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 Certificate for Foreign government (CFG)
in lieu of their own regulatory approval requirements. Our FDA corporate warning
letter prevents our ability to obtain CFGs; therefore, our ability to market new
products or renew marketing approvals in countries that rely on CFGs will
continue to be impacted until the corporate warning letter is resolved. Our
limited ability to market our full line of existing products and to launch new
products within these jurisdictions could have a material 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:
47
|
2007 versus
2006
|
2006 versus
2005
|
|||||||||||||||||||||||||||
|
As
Reported
|
Constant
|
As Reported
|
Constant
|
|||||||||||||||||||||||||
|
Currency
|
Currency
|
Currency
|
Currency
|
|||||||||||||||||||||||||
|
(in
millions)
|
2007
|
2006
|
2005
|
Basis
|
Basis
|
Basis
|
Basis
|
|||||||||||||||||||||
|
United
States
|
$ | 4,923 | $ | 4,840 | $ | 3,852 | 2 | % | 2 | % | 26 | % | 26 | % | ||||||||||||||
|
Europe
|
1,807 | 1,576 | 1,204 | 15 | % | 5 | % | 31 | % | 29 | % | |||||||||||||||||
|
Asia
Pacific
|
1,176 | 948 | 866 | 24 | % | 23 | % | 9 | % | 13 | % | |||||||||||||||||
|
Inter-Continental
|
451 | 457 | 361 | (1 | %) | (6 | %) | 27 | % | 23 | % | |||||||||||||||||
|
International
|
3,434 | 2,981 | 2,431 | 15 | % | 9 | % | 23 | % | 22 | % | |||||||||||||||||
|
Worldwide
|
$ | 8,357 | $ | 7,821 | $ | 6,283 | 7 | % | 5 | % | 24 | % | 24 | % | ||||||||||||||
The
following table provides our worldwide net sales by division and the relative
change on an as reported basis:
|
(in
millions)
|
2007
|
2006
|
2005
|
2007 versus
2006
|
2006 versus
2005
|
|||||||||||||||
|
Interventional
Cardiology
|
$ |
3,117
|
$ |
3,612
|
$ |
3,783
|
(14 | %) | (5 | %) | ||||||||||
|
Peripheral
Interventions/ Vascular Surgery
|
627
|
666
|
715
|
(6 | %) | (7 | %) | |||||||||||||
|
Electrophysiology
|
147
|
134
|
132
|
10 | % | 2 | % | |||||||||||||
|
Neurovascular
|
352
|
326
|
277
|
8 | % | 18 | % | |||||||||||||
|
Cardiac
Surgery
|
194
|
132
|
N/A
|
47 | % |
N/A
|
||||||||||||||
|
Cardiac
Rhythm Management
|
2,124
|
1,371
|
N/A
|
55 | % |
N/A
|
||||||||||||||
|
Cardiovascular
|
6,561
|
6,241
|
4,907
|
5 | % | 27 | % | |||||||||||||
|
Oncology
|
233
|
221
|
207
|
5 | % | 7 | % | |||||||||||||
|
Endoscopy
|
843
|
754
|
697
|
12 | % | 8 | % | |||||||||||||
|
Urology
|
403
|
371
|
324
|
9 | % | 15 | % | |||||||||||||
|
Endosurgery
|
1,479
|
1,346
|
1,228
|
10 | % | 10 | % | |||||||||||||
|
Neuromodulation
|
317
|
234
|
148
|
36 | % | 58 | % | |||||||||||||
|
Worldwide
|
$ |
8,357
|
$ |
7,821
|
$ |
6,283
|
7 | % | 24 | % | ||||||||||
We manage
our international operating regions and divisions on a constant currency basis,
and we manage market risk from currency exchange rate changes at the corporate
level. The relative change on a constant currency basis by division approximated
the change on an as reported basis. To calculate revenue growth rates that
exclude the impact of currency exchange, we convert actual current-period net
sales from local currency to U.S. dollars using constant currency exchange
rates. The regional constant currency growth rates in the table above can be
recalculated from our net sales by reportable segment as presented in Note P – Segment Reporting to
our 2007 consolidated financial statements included in Item 8 of this Form 10-K.
Growth rates are based on actual, non-rounded amounts and may not recalculate
precisely.
U.S. Net Sales
In 2007,
our U.S. net sales increased $83 million, or two percent, as compared to
2006. The increase related primarily to increases in U.S. CRM and Cardiac
Surgery business sales of $502 million due to a full year of consolidated
operations in 2007, whereas the results for these businesses were included only
following the April 21, 2006 acquisition date in 2006. In addition, we achieved
year-over-year U.S. sales growth of $64 million in our Endosurgery businesses
and $65 million in our Neuromodulation business. Offsetting these increases was
a decline in U.S. net sales of our TAXUS® drug-eluting stent system of $555
million, due primarily to a decrease in the size of the U.S. drug-eluting stent
market. This decrease was driven principally by continued declines in
drug-eluting stent penetration rates resulting from ongoing concerns regarding
the safety and efficacy of drug-eluting stents. Our U.S. drug-eluting stent
market share was stable during both
48
2007 and
2006; we maintained continuous market share of at least 53 percent throughout
those periods. See the Outlook section for a more
detailed discussion of both the drug-eluting stent and CRM markets and our
position within those markets.
In 2006,
our U.S. net sales increased $988 million, or 26 percent, as compared to
2005. The increase is related primarily to the inclusion of $1.025 billion of
U.S. net sales from our CRM and Cardiac Surgery businesses acquired in April
2006. In addition, we achieved year-over-year U.S. sales growth of
$83 million in our Endosurgery businesses and $75 million in our
Neuromodulation business. Offsetting these increases were declines in U.S. net
sales of our TAXUS drug-eluting stent system of $202 million, due principally to
a decrease in the size of the U.S. drug-eluting stent market, and a decline in
our average market share in 2006, as compared to 2005. In addition, decreases in
net sales of approximately $70 million were attributable to the first quarter
2006 expiration of our agreement to distribute certain third-party guidewire and
sheath products.
International Net
Sales
In 2007,
our international net sales increased $453 million, or 15 percent, as
compared to 2006. The increase related partially to an increase in net sales
from our CRM and Cardiac Surgery businesses of $210 million, due to a full year
of consolidated results in 2007, and $85 million associated with increased sales
of both ICD and pacemaker systems. In addition, net sales of our drug-eluting
stent systems in our Asia Pacific region increased $131 million in 2007, as
compared to 2006, due primarily to the May 2007 launch of our TAXUS®
Express2Ô coronary stent
system in Japan. The favorable impact of foreign currency fluctuations also
contributed $180 million to our sales growth in 2007. Offsetting these increases
were declines in net sales of our drug-eluting stent systems in our Europe and
Inter-Continental markets by $145 million in 2007, as compared to 2006, due
primarily to an overall decline in the size of the drug-eluting stent market as
well as market share declines in these regions, as additional competitive
products entered the market. See the Outlook section for a more
detailed discussion of both the drug-eluting stent and CRM markets and our
position within those markets.
In 2006,
our international net sales increased by $550 million, or 23 percent,
as compared to 2005. The increase related primarily to the inclusion of $478
million of international net sales from our CRM and Cardiac Surgery businesses
acquired in April 2006. The remainder of the increase in our net sales in these
markets was due to growth in various product franchises, including $35 million
in net sales from our Endosurgery businesses, as well as $27 million of sales
growth from our Neurovascular business.
Gross
Profit
In 2007,
our gross profit was $6.015 billion, as compared to $5.614 billion in 2006, an
increase of $401 million or seven percent. As a percentage of net sales, our
gross profit increased slightly to 72.0 percent for 2007, as compared to 71.8
percent for 2006. For 2006, our gross profit was $5.614 billion, as compared to
$4.897 billion for 2005. As a percentage of net sales, our gross profit
decreased to 71.8 percent for 2006, as compared to 77.9 percent for 2005. The
following is a reconciliation of our gross profit percentages from 2005 to 2006
and 2006 to 2007:
|
Year
Ended
|
||||||||
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Gross
profit - prior year
|
71.8 | % | 77.9 | % | ||||
|
Inventory
step-up charge in 2006
|
3.4 | % | (3.8 | )% | ||||
|
Shifts
in product mix
|
(1.8 | )% | (0.8 | )% | ||||
|
Impact
of lower production volumes
|
(0.8 | )% | ||||||
|
Impact
of period expenses
|
(0.8 | )% | (2.0 | )% | ||||
|
All
other
|
0.2 | % | 0.5 | % | ||||
|
Gross
profit - current year
|
72.0 | % | 71.8 | % | ||||
49
Included
in cost of products sold for 2006 was an adjustment of $267 million,
representing the step-up value of acquired Guidant inventory sold during the
year. There were no amounts included in our 2007 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. Factors contributing to a shift in our
product sales mix toward lower margin products in 2007 included a decrease in
sales of our higher margin TAXUS® drug-eluting stent system and an increase in
sales of our CRM products, which generally have lower gross profit
margins. In addition, we have manufactured lower volumes of certain
of our products, including our drug-eluting stent systems, which has resulted in
higher unit costs during 2007. Our period expenses included, among
other items, increased charges for scrapped inventory in 2007 as compared to
2006.
Included
in cost of products sold for 2006 was the $267 million inventory step-up
adjustment discussed above, whereas there were no such amounts included in our
2005 cost of products sold. In addition, increases in period
expenses, including costs associated with Project Horizon, contributed to a
decline in our gross profit percentage for 2006, as compared to 2005. Further,
our 2006 gross profit percentage was negatively impacted as compared to 2005 due
to shifts in our product sales mix toward lower margin products, including a
decrease in sales of our TAXUS drug-eluting stent system and an increase in
sales of our CRM products.
Operating
Expenses
The
following table provides a summary of our operating expenses, excluding
purchased research and development, restructuring charges, litigation-related
charges and losses on assets held for sale:
|
2007
|
2006
|
2005
|
|||||||
|
(in
millions)
|
$
|
% of Net
Sales
|
$
|
% of Net
Sales
|
$
|
% of Net
Sales
|
|||
|
Selling,
general and administrative expenses
|
2,909
|
34.8
|
2,675
|
34.2
|
1,814
|
28.9
|
|||
|
Research
and development expenses
|
1,091
|
13.1
|
1,008
|
12.9
|
680
|
10.8
|
|||
|
Royalty
expense
|
202
|
2.4
|
231
|
3.0
|
227
|
3.6
|
|||
|
Amortization
expense
|
641
|
7.7
|
530
|
6.8
|
152
|
2.4
|
|||
Selling, General and Administrative
(SG&A) Expenses
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: $266 million in incremental SG&A expenditures
associated with a full year of consolidated CRM and Cardiac Surgery operations,
offset partially by decreases in spending attributable to planned expense
reductions initiated in the fourth quarter of 2007. Refer to the Strategic Initiatives section
for more discussion of these expense reduction initiatives.
In 2006,
our SG&A expenses increased by $861 million, or 47 percent, as compared
to 2005. As a percentage of our net sales, SG&A expenses increased to
34.2 percent in 2006 from 28.9 percent in 2005. The increase in our
SG&A expenses related primarily to: $670 million in expenditures associated
with CRM and Cardiac Surgery; $65 million of acquisition-related costs
associated primarily with certain Guidant integration and retention
programs; $63 million due primarily to increased head count attributable to the
expansion of our sales force within our international regions and
Neuromodulation business; and $55 million in incremental stock-based
compensation expense associated with the adoption of Statement No. 123(R), Share-Based
Payment. Refer to Note N - Stock Ownership Plans
to our 2007 consolidated financial statements included in Item 8 of this
Form 10-K for a more detailed discussion of our adoption of Statement No.
123(R).
Research and Development (R&D)
Expenses
Our
investment in R&D reflects spending on regulatory compliance and clinical
research as well as new product development programs. In 2007, our R&D
expenses increased by $83 million, or 8 percent, as
50
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 $142 million in incremental R&D expenditures associated
with a full year of consolidated CRM and Cardiac Surgery 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. See the Purchased
Research and Development section for further discussion regarding the
cancellation of this program. We do not expect these program cancellations
to materially impact our future operations or cash flows.
In 2006,
our R&D expenses increased by $328 million, or 48 percent, as
compared to 2005. As a percentage of our net sales, R&D expenses increased
to 12.9 percent in 2006 from 10.8 percent in 2005. The increase
related primarily to: the inclusion of $270 million in R&D expenditures
associated with our CRM and Cardiac Surgery businesses; approximately $30
million in costs related to the cancellation of the TriVascular AAA program; $24
million of stock-based compensation expense associated with the adoption of
Statement No. 123(R); and $13 million of acquisition-related costs associated
with certain Guidant integration and retention programs.
Royalty Expense
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, due to shifts in our sales mix toward products with lower
royalties. 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 CRM and Cardiac Surgery products of $13 million, due to a full
year of consolidated results.
In 2006,
our royalty expense increased by $4 million, or two percent, as
compared to 2005. The increase was due to $25 million of royalty expense
associated with CRM and Cardiac Surgery products. This increase was offset
partially by a decrease in royalty expense attributable to sales of our TAXUS
stent system by $20 million for 2006 as compared to 2005, due primarily to
a decrease in TAXUS stent system sales. As a percentage of net sales, royalty
expense decreased to 3.0 percent in 2006 from 3.6 percent in 2005, due
primarily to the inclusion of net sales from our CRM and Cardiac Surgery
products, which on average have a lower royalty cost relative to legacy Boston
Scientific products.
Amortization
Expense
In 2007,
our amortization expense increased by $111 million, or 21 percent, as compared
to 2006. As a percentage of our net sales, amortization expense increased to 7.7
percent in 2007 from 6.8 percent in 2006. The increase in our amortization
expense related primarily to $147 million of incremental amortization associated
with intangible assets obtained as part of the Guidant acquisition, due to a
full year of amortization. In addition, amortization expense included $21
million attributable to the write-off of intangible assets 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 PetalÔ bifurcation
stent. We do not expect this decision to materially impact our future
operations or cash flows. These increases were offset by the inclusion in 2006
of the write-off of intangible assets of: $23 million attributable to the
cancellation of the TriVascular AAA program, $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)Ô
technology.
In 2006,
our amortization expense increased by $378 million, or 249 percent, as
compared to 2005. As a percentage of our net sales, amortization expense
increased to 6.8 percent in 2006 from 2.4 percent in 2005.
51
The
increase in our amortization expense related primarily to: $334 million of
amortization of intangible assets obtained as part of the Guidant acquisition;
$23 million for the write-off of intangible assets due to the cancellation of
the TriVascular AAA program; $21 million for the write-off of the intangible
assets associated with developed technology obtained as part of our 2005
acquisition of Rubicon; and $12 million for the write-off of the intangible
assets associated with our RPM technology, a discontinued technology platform
obtained as part of our acquisition of Cardiac Pathways Corporation. The
write-off of the RPM intangible assets resulted from our decision to cease
investment in the technology. The write-off of the Rubicon developed technology
resulted from our decision to cease development of the first generation of the
technology and concentrate resources on the development and commercialization of
the next-generation product.
Purchased Research and
Development
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 consists of a
pressure-sensing system development project, which will be combined with our
existing CRM devices. As of December 31, 2007, 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 2013 in Europe and
certain other international countries, and in the U.S. in 2016, subject to
regulatory approval. We expect material net cash inflows from such products to
commence in 2016, 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 our investment in EndoTex Interventional Systems,
Inc.
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 products 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 is dependent on future
research and development activity and regulatory approvals, and the asset had no
alternative future use as of the acquisition date. We will recognize the
milestone payments, if received, as a gain in our financial statements at the
time of receipt.
The most
significant purchased research and development projects acquired from Guidant
include 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. The next-generation products using this
platform include the COGNISÔ CRT-D
52
device,
the TELIGENÔ
ICD device and the INGENIOÔ pacemaker system.
During the first quarter of 2008, we received CE Mark approval for our COGNIS
CRT-D device, which includes defibrillation capability, and the TELIGEN ICD
device, and expect a full European launch by the end of the second quarter of
2008. We expect a U.S. launch of the COGNIS and TELIGEN devices in the second
half of 2008, following regulatory approval. We expect to launch the INGENIO
device in both Europe and the U.S. in the second half of 2010. As of December
31, 2007, we estimate that the total cost to complete the COGNIS and TELIGEN
technology is between $25 million and $35 million, and the cost to complete the
INGENIO technology is between $30 million and $35 million. We expect material
net cash inflows from the COGNIS and TELIGEN devices to commence in the second
half of 2008 and material net cash inflows from the INGENIO device to commence
in the second half of 2010.
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, which is a private-labeled XIENCEÔ V drug-eluting
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.
In June 2007, Abbott submitted the final module of a pre-market approval (PMA)
application to the FDA seeking approval in the U.S. for both the XIENCE V and
PROMUS stent systems. In November 2007, the FDA advisory panel reviewing
Abbott’s PMA submission voted to recommend the stent systems for
approval. Following FDA approval, which Abbott is expecting in the
first half of 2008, we plan to launch the PROMUS stent system in the U.S. We
expect to launch an internally developed and manufactured next-generation
everolimus-based stent in Europe in late 2009 or early 2010 and in the U.S. in
late 2012 or early 2013. We expect that material net cash inflows from our
internally developed and manufactured everolimus-based drug-eluting stent will
commence in 2013, following its approval in the U.S. As of December 31, 2007, we
estimate that the cost to complete our internally manufactured next-generation
everolimus-eluting stent technology project is between $200 million and $250
million.
In 2005,
we recorded $276 million of purchased research and development consisting of
$130 million relating to our acquisition of TriVascular, $73 million relating to
our acquisition of AST, $45 million relating to our acquisition of Rubicon, and
$3 million relating to our acquisition of CryoVascular. In addition, we recorded
$25 million of purchased research and development in conjunction with entering
the product development agreement with Aspect.
The most
significant 2005 purchased research and development projects included
TriVascular’s AAA stent-graft and AST’s Petal™ bifurcation stent, which
collectively represented 73 percent of our 2005 purchased research and
development. During 2006, management cancelled the TriVascular AAA stent-graft
program. In addition, in connection with our expense and head count reduction
plan, in 2007, we decided to suspend further significant funding of research and
development associated with the Petal stent project and may or may
not decide to pursue its completion. We do not expect these program
cancellations and related write-downs to impact our future operations or cash
flows materially. In connection with the cancellation of the TriVascular AAA
program, we recorded $67 million credit to purchased research and development in
2006, representing the reversal of our accrual for contingent payments recorded
in the initial purchase accounting.
Restructuring
In 2007,
we recorded $176 million of restructuring charges. In addition, we
recorded $29 million of expenses within other lines of our consolidated
statements of operations related to our restructuring initiatives. In October
2007, our Board of Directors approved, and we committed to, an expense and head
count reduction plan, which will result 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. As of December 31, 2007, we had completed more than half of
the anticipated head count reductions. 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 and product franchises in order to leverage
resources, strengthen competitive positions, and create a more simplified and
efficient business model; the elimination, suspension or reduction of
53
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 completed worldwide by the end of
2008.
We expect
that the execution of this plan will result in total pre-tax expenses of
approximately $425 million to $450 million. We expect the plan to
result in cash outlays of approximately $400 million to $425
million. The following table provides a summary of our estimates of
total costs associated with the plan by major type of cost:
|
Type
of cost
|
Total
amount expected to be incurred
|
|
Termination
benefits
|
$260
million to $270 million
|
|
Retention
incentives
|
$60
million to $65 million
|
|
Asset
write-offs and accelerated depreciation
|
$45
million to $50 million
|
|
Other
*
|
$60
million to $65 million
|
* Other
costs consist primarily of costs to transfer product lines from one facility to
another and consultant fees.
In 2007,
we incurred total restructuring costs of $205 million. The following presents
these costs by major type and line item within our consolidated statements of
operations:
|
Termination
Benefits
|
Retention
Incentives
|
Intangible
Asset
Write-offs
|
Fixed
Asset
Write-offs
|
Accelerated
Depreciation
|
Other
|
Total
|
||||||||||||||||||||||
|
Cost
of goods sold
|
$ | 1 | $ | 1 | $ | 2 | ||||||||||||||||||||||
|
Selling,
general and adminstrative expenses
|
2 | 2 | 4 | |||||||||||||||||||||||||
|
Research
and development expenses
|
2 | 2 | ||||||||||||||||||||||||||
|
Amortization
expense
|
$ | 21 | 21 | |||||||||||||||||||||||||
|
Restructuring
charges
|
$ | 158 | $ | 8 | $ | 10 | 176 | |||||||||||||||||||||
| $ | 158 | $ | 5 | $ | 21 | $ | 8 | $ | 3 | $ | 10 | $ | 205 | |||||||||||||||
The
termination benefits recorded during 2007 represent primarily amounts incurred
pursuant to our on-going benefit arrangements, and have been recorded in
accordance with Financial Accounting Standards Board (FASB) Statement No. 112,
Employer’s Accounting for
Postemployment Benefits. We expect to record the remaining
termination benefits in 2008 when we identify with more specificity the job
classifications, functions and locations of the remaining head count to be
eliminated. The asset write-offs relate to intangible assets and
property, plant and equipment that are not recoverable following our decision in
October 2007 to (i) commit to the expense and head count reduction plan,
including the elimination, suspension or reduction of spending on certain
R&D projects, and (ii) restructure several businesses. The
retention incentives represent cash incentives, which are being recorded over
the future service period during which eligible employees must remain employed
with us to retain the award. The other restructuring costs 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, Accounting for Costs Associated with
Exit or Disposal Activities.
We made
approximately $40 million of cash outlays associated with our restructuring
initiatives in 2007, which related to termination benefits, other restructuring
charges and retention incentive payments. These payments were made
using cash generated from our operations. We expect to make the
remaining cash outlays throughout 2008 and into 2009 using cash generated from
operations.
As a
result of our restructuring initiatives, we expect to reduce R&D and
SG&A expenses by $475 million to $525 million against a $4.1 billion
baseline, which represents our estimated annual R&D and SG&A expenses
54
at the
time we committed to these initiatives in 2007. This range represented the
annualized run rate amount of reductions we expect to achieve as we exit 2008,
as the implementation of these initiatives will take place throughout the year;
however, we expect to realize the majority of these savings in 2008. In
addition, we expect to reduce our R&D and SG&A expenses by an additional
$25 million to $50 million in 2009.
Refer to
Note G – Restructuring
Activities to our 2007 consolidated financial statements included in Item
8 of this Form 10-K for more information on our restructuring
plan.
Litigation-Related
Charges
In 2007,
we recorded a $365 million pre-tax charge associated with on-going patent
litigation involving our Interventional Cardiology business. See further
discussion of our material legal proceedings in Item 3. Legal Proceedings and
Note L — Commitments and
Contingencies to our 2007 consolidated financial statements included in
Item 8 of this Form 10-K.
In 2005,
we recorded a $780 million pre-tax charge associated with a litigation
settlement with Medinol, Ltd. On September 21, 2005, we reached a
settlement with Medinol resolving certain contract and patent infringement
litigation. In conjunction with the settlement agreement, we paid
$750 million in cash and cancelled our equity investment in
Medinol.
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 businesses. Refer to
the Strategic Initiatives
section and Note E –
Assets Held for Sale to our 2007 consolidated financial statements
included in Item 8 of this Form 10-K for more information on these
transactions.
Interest
Expense
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. Higher debt levels in 2007 contributed incremental interest expense
of $109 million. At December 31, 2007, $5.433 billion of our total debt was
at fixed interest rates, representing 66 percent of our total debt or 81
percent of our net debt4 balance.
Our
interest expense increased to $435 million in 2006 from $90 million in
2005. The increase in our interest expense related primarily to an increase in
our average debt levels used to finance the Guidant acquisition, as well as an
increase in our average borrowing rate.
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 C - Acquisitions
to our 2007 consolidated financial statements included in Item 8 of
this Form 10-K.
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 income of $23 million in 2007, expense of $56 million in
2006, and income of
|
4
|
Our net debt balance represents
our total debt less our cash, cash equivalents and marketable securities.
Refer to the Liquidity and Capital
Resources section for more
information.
|
55
$13 million
in 2005. Our other, net included investment write-downs of $124 million in 2007,
$121 million in 2006, and $17 million in 2005, attributable primarily to
other-than-temporary declines in the fair value of our equity investments in,
and notes receivable from, certain publicly traded and privately held companies.
Our 2007 write-downs related to impairments of multiple investments. Our 2006
write-downs related primarily to a $34 million write-down associated with an
investment in a gene therapy company and a $27 million write-down associated
with one of our vascular sealing portfolio companies; the remainder of our 2006
write-downs related to impairments of multiple investments. These write-downs
were offset partially by realized gains on investments of $65 million in 2007,
$9 million in 2006, and $4 million in 2005. Refer to Note F – Investments and Notes
Receivable to our 2007 consolidated financial statements included in Item
8 of this Form 10-K for more information regarding our investment portfolio. In
addition, our other, net included interest income of $79 million in 2007, $67
million in 2006, and $36 million in 2005. Our interest income increased in
2007, as compared to 2006, due primarily to higher average cash balances, offset
by lower average investment rates. Our interest income increased in 2006, as
compared to 2005, due primarily to increases in our cash and cash equivalents
balances and increases in average market interest rates.
Tax Rate
The
following table provides a summary of our reported tax rate:
|
Percentage
Point
Decrease
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
vs.
2006
|
2006
vs.
2005
|
||||||||||||||||
|
Reported
tax rate
|
(13.0 | ) % | 1.2 | % | 29.5 | % | (14.2 | ) % | (28.3 | ) % | ||||||||||
|
Impact
of certain charges
|
(25.6 | ) % | (20.2 | ) % | 5.5 | % | (5.4 | ) % | (25.7 | ) % | ||||||||||
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
revenues, and the impact of certain charges during 2007 that are taxed at
different rates than our effective tax rate. These charges included legal and
restructuring reserves, purchased research and development and goodwill
write-downs not deductible for tax purposes, as well as discrete items
associated with resolution of various tax matters and changes in estimates for
tax benefits claimed related to prior periods. In 2006, the decrease
in our reported tax rate, as compared to 2005, related primarily to the impact
of certain charges during 2006 that were taxed at different rates than our
effective tax rate. These charges included purchased research and development,
asset write-downs, reversal of taxes associated with unremitted earnings and tax
gains on the sale of intangible assets.
Management
currently estimates that our 2008 effective tax rate, excluding certain charges,
will be approximately 21 percent, due primarily to our intention to
reinvest offshore substantially all of our offshore earnings, and based upon the
anticipated retro-active re-enactment of the U.S. R&D tax credit for all of
2008. However, acquisitions or dispositions in 2008 and geographic changes in
the manufacture of our products may positively or negatively impact our
effective tax rate.
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes. As a result of the implementation of Interpretation No. 48, we
recognized a $126 million increase in our liability for unrecognized tax
benefits. Approximately $26 million of this increase was reflected as a
reduction to the January 1, 2007 balance of retained
earnings. Substantially all of the remaining increase related to
pre-acquisition uncertain tax liabilities related to Guidant, which we recorded
as an increase to goodwill in accordance with Emerging Issues Task Force (EITF)
Issue No. 93-7, Uncertainties
Related to Income Taxes in a Purchase Business
Combination.
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 1997. Substantially all material state, local, and
foreign income tax matters have been concluded for all years through
2001.
56
The
following provides a summary of key performance indicators that we use to assess
our liquidity and operating performance.
Net Debt5
|
As of December
31,
|
||||||||
|
(in
millions)
|
2007
|
2006
|
||||||
|
Short-term
debt
|
$ |
256
|
$ |
7
|
||||
|
Long-term
debt
|
7,933
|
8,895
|
||||||
|
Total
debt
|
8,189
|
8,902
|
||||||
|
Less:
cash and cash equivalents
|
1,452
|
1,668
|
||||||
|
Net debt
|
$ |
6,737
|
$ |
7,234
|
||||
EBITDA6
|
(in
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Net
(loss) income
|
$ | (495 | ) | $ | (3,577 | ) | $ |
628
|
||||
|
Interest
income
|
(79 | ) | (67 | ) | (36 | ) | ||||||
|
Interest
expense
|
570
|
435
|
90
|
|||||||||
|
Income
tax (benefit) expense
|
(74 | ) |
42
|
263
|
||||||||
|
Depreciation
and amortization
|
939
|
781
|
314
|
|||||||||
|
EBITDA
|
$ |
861
|
$ | (2,386 | ) | $ |
1,259
|
|||||
Cash
Flow
|
(in
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Cash
provided by operating activities
|
$ |
934
|
$ |
1,845
|
$ |
903
|
||||||
|
Cash
used for investing activities
|
(474 | ) | (9,312 | ) | (551 | ) | ||||||
|
Cash
(used for) provided byfinancing activities
|
(680 | ) |
8,439
|
(954 | ) | |||||||
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
decrease in operating cash flow in 2007, as
|
5
|
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.
|
|
6
|
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 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
acquisition-, divestiture-, litigation- and restructuring-related charges
(pre-tax) of $1.231 billion in 2007 and $4.628 billion in 2006; see the
Executive
Summary
section above for a description of these charges. Our 2005
EBITDA included acquisition-, divestiture-, litigation- and
restructuring-related charges (pre-tax) of $1.102 billion, related
primarily to a litigation settlement with Medinol and purchased research
and development.
|
57
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; a decrease 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 C – Acquisitions to our
consolidated financial statements included in Item 8 of this Form 10-K for
further details.
Investing
Activities
We made
capital expenditures of $363 million in 2007, as compared to $341 million
in 2006, including $110 million associated with our CRM and Cardiac Surgery
businesses. We expect to incur capital expenditures of approximately
$450 million during 2008, 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 continuous growth in our business units.
Our
investing activities during 2007 included $136 million of cash payments for
acquisitions of businesses, investments in publicly traded and privately held
companies, and acquisitions of certain technology rights; as well as $248
million in contingent payments, associated primarily with Advanced Bionics;
offset partially by $243 million of gross proceeds from the monetization of
several of our investments in, and notes receivable from, certain privately held
and publicly traded companies.
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 approximately
$90 million and approximately $10 million in cash, in addition to our previous
investments of approximately $40 million, to acquire the remaining interests of
EndoTex, and may be required to pay future consideration that is contingent upon
EndoTex achieving certain performance-related milestones.
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, to acquire Remon,
in addition to our previous investments of $3 million to acquire the remaining
interests of Remon. We may also be required to make future payments contingent
upon Remon achieving certain performance-related milestones.
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. During 2007, we amended our
term loan and revolving credit facility agreement and prepaid $1.0 billion
outstanding under the term loan, using $750 million of cash on hand and $250
million in borrowings against a credit facility secured by our U.S. trade
receivables. There was $250 million outstanding under this facility at December
31, 2007 and none outstanding at December 31, 2006. There were no amounts
outstanding under our separate $2.0 billion revolving credit facility as of
December 31, 2007 and 2006. 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 C – Acquisitions
to our 2007 consolidated financial statements included in Item 8 of this Form
10-K for more information regarding the Abbott transaction.
We had
total debt of $8.189 billion at December 31, 2007 at an average
interest rate of 6.36 percent as compared to total debt of
$8.902 billion at December 31, 2006 at an average interest rate of
6.03 percent. The
58
debt maturity
schedule for the significant components of our debt obligations as of
December 31, 2007, is as follows:
|
Payments Due by
Period
|
|||||||||||||||||||||||||||
|
(in
millions)
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
||||||||||||||||||||
|
Term
loan
|
$ | 300 | $ | 1,700 | $ | 2,000 | $ | 4,000 | |||||||||||||||||||
|
Abbott
loan
|
900 | 900 | |||||||||||||||||||||||||
|
Senior
notes
|
850 | $ | 2,200 | 3,050 | |||||||||||||||||||||||
|
Credit and
security facility
|
$ | 250 | 250 | ||||||||||||||||||||||||
| $ | 250 | $ | 300 | $ | 1,700 | $ | 3,750 |
|
$ | 2,200 | $ | 8,200 | |||||||||||||||
In
January 2008, following the closing of the sale of, and receipt of proceeds for,
three of our businesses, we prepaid an additional $200 million of our term loan,
reducing the scheduled maturity in April 2009. We expect to make a further
payment of $425 million before the end of the first quarter of 2008. These
prepayments will satisfy the remaining obligation due in April 2009 and reduce
the 2010 maturity by $325 million. 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.
Our term
loan and revolving credit facility agreement requires that we maintain certain
financial covenants. Among other items, our 2007 amendment extends a step-down
in the maximum permitted ratio of debt to consolidated EBITDA, as defined by the
agreement, as follows:
|
From:
|
To: |
|
4.5
times to 3.5 times on March 31, 2008
|
4.5
times to 4.0 times on March 31, 2009, and
|
|
|
4.0
times to 3.5 times on September 30,
2009
|
The
amendment also provides for an exclusion from the calculation of
consolidated EBITDA, as defined by the agreement, of up to $300 million of
restructuring charges incurred through June 30, 2009 and up to $500 million of
litigation and settlement expenses incurred (net of any litigation or settlement
income received) in any consecutive four fiscal quarters, not to exceed $1.0
billion in the aggregate, through June 30, 2009. Other than the amended
exclusions from the calculation of consolidated EBITDA, there was no change in
our minimum required ratio of consolidated EBITDA, as defined by the agreement,
to interest expense of greater than or equal to 3.0 to 1.0. As of December 31,
2007, we were in compliance with the required covenants. Exiting 2007, our ratio
of debt to consolidated EBITDA was approximately 3.6 to 1.0 and our ratio
of consolidated EBITDA to interest expense was approximately 4.0 to 1.0.
Our inability to maintain these covenants could require that we 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.
During
2007, our credit ratings from Standard & Poor’s Rating Services (S&P)
and Fitch Ratings were downgraded to BB+, and our credit rating from Moody’s
Investor Service was downgraded to Ba1. These ratings are below investment grade
and the ratings outlook by all three rating agencies is currently negative.
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.
Equity
59
based
compensation expense as a result of these exchanges because the fair values of
the options exchanged equaled the fair values of the DSUs issued.
During
2007, we received $132 million in proceeds from stock issuances related to
our stock option and employee stock purchase plans, as compared to $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 exercise and stock purchase patterns of
employees.
We did
not repurchase any of our common stock during 2007 or 2006. We repurchased
approximately 25 million shares of our common stock at an aggregate cost of
$734 million in 2005. 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, 2007. See Note C - Acquisitions, Note H -
Borrowings and Credit Arrangements and Note J - Leases to our 2007
consolidated financial statements included in Item 8 of this Form 10-K
for additional information regarding our acquisitions, debt obligations and
lease arrangements.
|
Payments Due by
Period
|
||||||||||||||||||||||||||||
|
(in
millions)
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Operating
leases†
|
$ | 64 | $ | 49 | $ | 37 | $ | 24 | $ | 17 | $ | 49 | $ | 240 | ||||||||||||||
|
Capital
leases
|
5 | 4 | 3 | 3 | 3 | 47 | 65 | |||||||||||||||||||||
|
Purchase
obligations†,
††
|
105 | 5 | 2 | 112 | ||||||||||||||||||||||||
|
Minimum
royalty obligations†
|
16 | 29 | 26 | 14 | 1 | 6 | 92 | |||||||||||||||||||||
|
Unrecognized
tax benefits
|
60 | 60 | ||||||||||||||||||||||||||
|
Interest
payments†,
†††
|
462 | 441 | 365 | 213 | 133 | 880 | 2,494 | |||||||||||||||||||||
| $ | 712 | $ | 528 | $ | 433 | $ | 254 | $ | 154 | $ | 982 | $ | 3,063 | |||||||||||||||
|
†
|
In
accordance with U.S. GAAP, these obligations relate to expenses associated
with future periods and are not reflected in our consolidated balance
sheets.
|
|
††
|
These
obligations relate primarily to inventory commitments and capital
expenditures entered in the normal course of
business.
|
|
†††
|
Interest
payment amounts related to our term loan are projected using market
interest rates as of December 31, 2007. 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 $1.284 billion, the timing
of which is uncertain. Refer to Note K – Income Taxes to our
2007 consolidated financial statements included in Item 8 of this Form 10-K for
more information on these unrecognized tax benefits.
Certain
of our acquisitions involve the payment of contingent consideration. See Note C - Acquisitions to our
2007 consolidated financial statements included in Item 8 of this
Form 10-K 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
60
with our
amended merger agreement are accrued as of December 31, 2007, 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, 2007, we had outstanding letters of credit and bank guarantees of
approximately $110 million, as compared to approximately $90 million at December
31, 2006, which consisted primarily of financial lines of credit provided by
banks and collateral for workers’ compensation programs. We enter
these letters of credit and bank guarantees in the normal course of business. As
of December 31, 2007, none of the beneficiaries had drawn upon the letters of
credit or guarantees. At this time, we do not believe we will be required to
fund any amounts from the guarantees or letters of credit and, accordingly, we
have not recognized a related liability in our consolidated balance sheets as of
December 31, 2007 or 2006.
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 2007 consolidated financial statements included in
Item 8 of this Form 10-K.
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. We recognize revenue
from consignment arrangements based on product usage, or implant, which
indicates that the sale is complete. For all other transactions, we recognize
revenue when title to the goods and risk of loss transfer to the customer,
provided there are no substantive remaining performance obligations
required of us or any matters requiring customer acceptance. For
multiple-element arrangements, whereby the sale of devices is combined with
future service obligations, 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
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
61
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, obsolete or expired inventory primarily on our
estimates of forecasted net sales and production levels. 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, obsolete or expired
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 the
estimates related to excess and obsolete inventory.
Valuation of Business
Combinations
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
The
valuation of purchased research and development represents the estimated fair
value at the dates of acquisition related to in-process projects. 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. We expense
the value attributable to these in-process projects at the time of the
acquisition. 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
acquisitions 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
62
projects
acquired in connection with our recent acquisitions, we used the following
ranges of risk-adjusted discount rates to discount our projected cash flows: 19
percent in 2007, 13 percent to 17 percent in 2006, and 18 percent to
27 percent in 2005. 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 their remaining useful life. 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 estimate of an intangible asset’s remaining useful life is changed, we
amortize the remaining carrying value of the intangible asset prospectively over
the revised remaining useful life.
Goodwill
Impairment
Annually
we test our goodwill balances during the second quarter of the year as of April
1, the beginning of our second quarter, using financial information available at
that time. We test our goodwill balances more frequently if certain 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. In 2007 and 2006,
we identified our ten domestic divisions, which in aggregate make up the U.S.
reportable segment, and our three 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 June 30 interim 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.
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. 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 APB Opinion No.
18, The Equity Method of
Accounting for Investments in Common Stock, 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.
63
See Note A - Significant Accounting
Policies and Note F-
Investments and Notes Receivable to our 2007 consolidated financial
statements included in Item 8 of this Form 10-K 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 $1.605 billion at December 31,
2007 and $2.201 billion at December 31, 2006. 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
$7.804 billion at December 31, 2007 and $7.186 billion at
December 31, 2006.
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 2007 consolidated financial statements included in Item 8 of this
Form 10-K for a detailed analysis of our income tax
accounting.
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 general and
product liability claims. We maintain insurance policies providing limited
coverage against securities claims. We 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
64
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 $994 million
at December 31, 2007 and $485 million at December 31, 2006. The
amounts accrued represent primarily accrued amounts related to assumed Guidant
litigation and product liability claims recorded as part of the purchase price,
as well as amounts associated with on-going patent litigation involving our
Interventional Cardiology business. See further discussion of our material legal
proceedings in Item 3. Legal
Proceedings and Note L — Commitments and
Contingencies to our 2007 consolidated financial statements included in
Item 8 of this Form 10-K 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
2007 consolidated financial statements included in Item 8 of this Form 10-K for
more information regarding our application of Interpretation No. 48 and its
impact on our consolidated 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). We adopted Statement No. 158 in
2006. Refer to Note A –
Significant Accounting Policies to our 2007 consolidated financial
statements included in Item 8 of this Form 10-K for more information on our
pension and other postretirement plans.
Issue No. 06-3
In June
2006, the FASB ratified EITF Issue No. 06−3, How Taxes Collected from Customers
and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation). The scope of this
consensus includes any taxes assessed by a governmental authority that are
directly imposed on a revenue producing transaction between a seller and a
customer and may include, but are not limited to: sales, use, value-added, and
some excise taxes. Per Issue No. 06-3, the presentation of these taxes on either
a gross (included in revenues and costs) or a net (excluded from revenues) basis
is an accounting policy decision that should be disclosed. We present sales net
of sales taxes in our consolidated statements of operations. We adopted Issue
No. 06−3 as of the first quarter of 2007. No change of presentation has resulted
from our adoption.
Statement No.
123(R)
In
December 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 Accounting
65
Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees, and amends FASB Statement No. 95, Statement of Cash Flows. We
adopted Statement No. 123(R) as of January 1, 2006. Refer to Note N – Stock Ownership Plans
to our 2007 consolidated financial statements included in Item 8 of this
Form 10-K for discussion of our adoption of the standard and its impact on our
consolidated financial statements.
New Standards to be
Implemented
Statement No.
141(R)
In
December 2007, the FASB issued Statement No. 141(R), Business Combinations, a
replacement for Statement No. 141. The Statement 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.
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 are required to apply the provisions of
Statement No. 157 prospectively as of January 1, 2008, and recognize any
transition adjustment as a cumulative-effect adjustment to the opening balance
of retained earnings. We are in the process of determining the effect of
adoption of Statement No. 157, but we do not believe its adoption will
materially impact our future results of operations or financial
position.
Statement No.
159
In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement
No. 115, which allows an entity to elect to record financial assets
and liabilities at fair value upon their initial recognition on a
contract-by-contract basis. Subsequent changes in fair value would be recognized
in earnings as the changes occur. We will adopt Statement No. 159 beginning in
the first quarter of 2008. We are currently evaluating the impact that the
adoption of Statement No. 159 will have on our consolidated financial
statements, but we do not believe its adoption will materially impact our future
results of operations or financial position.
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, 2007. 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, 2007, 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
|
66
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, 2007, 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, 2007,
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, 2007 and December 31, 2006 and the
related consolidated statements of operations, stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2007 of
Boston Scientific Corporation and our report dated February 25, 2008 expressed
an unqualified opinion thereon.
/s/ Ernst & Young
LLP
Boston,
Massachusetts
February
25, 2008
67
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We
develop, manufacture and sell medical devices globally and our earnings and cash
flow 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 nonperformance on
derivative instruments by entering into contracts with a diversified group of
major financial institutions and by 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 $4.135 billion at December 31, 2007 and $3.413 billion
at December 31, 2006. We recorded $19 million of other assets and $118
million of other liabilities to recognize the fair value of these derivative
instruments at December 31, 2007 as compared to $71 million of other assets
and $27 million of other liabilities at December 31, 2006. A
ten percent appreciation in the U.S. dollar’s value relative to the hedged
currencies would increase the derivative instruments’ fair value by $293 million
at December 31, 2007 and by $112 million at December 31, 2006. A ten
percent depreciation in the U.S. dollar’s value relative to the hedged
currencies would decrease the derivative instruments’ fair value by $355 million
at December 31, 2007 and by $134 million at December 31, 2006. 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 I - Financial
Instruments to our 2007 consolidated financial statements included in
Item 8 of this Form 10-K for detailed information regarding our derivative
financial instruments.
68
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, 2007 and 2006, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2007. 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, 2007 and 2006, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2007, 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 notes K and Q 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. As discussed in notes N and Q to the accompanying
consolidated financial statements, effective January 1, 2006, the Company
adopted Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment.
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, 2007, 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 25, 2008, expressed an unqualified opinion thereon.
/s/ Ernst & Young
LLP
Boston,
Massachusetts
February
25, 2008
69
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
(in
millions, except per share data)
|
Year Ended December
31,
|
|||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
sales
|
$ |
8,357
|
$ |
7,821
|
$ |
6,283
|
||||||
|
Cost
of products sold
|
2,342
|
2,207
|
1,386
|
|||||||||
|
Gross
profit
|
6,015
|
5,614
|
4,897
|
|||||||||
|
Operating
expenses
|
||||||||||||
|
Selling,
general and administrative expenses
|
2,909
|
2,675
|
1,814
|
|||||||||
|
Research
and development expenses
|
1,091
|
1,008
|
680
|
|||||||||
|
Royalty
expense
|
202
|
231
|
227
|
|||||||||
|
Amortization
expense
|
641
|
530
|
152
|
|||||||||
|
Purchased
research and development
|
85
|
4,119
|
276
|
|||||||||
|
Restructuring
charges
|
176
|
|||||||||||
|
Litigation-related
charges
|
365
|
780
|
||||||||||
|
Loss
on assets held for sale
|
560
|
|||||||||||
|
6,029
|
8,563
|
3,929
|
||||||||||
|
Operating
(loss) income
|
(14 | ) | (2,949 | ) |
968
|
|||||||
|
Other
income (expense)
|
||||||||||||
|
Interest
expense
|
(570 | ) | (435 | ) | (90 | ) | ||||||
|
Fair-value
adjustment for the sharing of proceeds feature of
the Abbott Laboratories stock purchase
|
(8 | ) | (95 | ) | ||||||||
|
Other,
net
|
23
|
(56 | ) |
13
|
||||||||
|
(Loss)
income before income taxes
|
(569 | ) | (3,535 | ) |
891
|
|||||||
|
Income
tax (benefit) expense
|
(74 | ) |
42
|
263
|
||||||||
|
Net (loss)
income
|
$ | (495 | ) | $ | (3,577 | ) | $ |
628
|
||||
|
Net (loss) income per common
share
|
||||||||||||
|
Basic
|
$ | (0.33 | ) | $ | (2.81 | ) | $ |
0.76
|
||||
|
Assuming
dilution
|
$ | (0.33 | ) | $ | (2.81 | ) | $ |
0.75
|
||||
|
Weighted-average
shares outstanding:
|
||||||||||||
|
Basic
|
1,486.9
|
1,273.7
|
825.8
|
|||||||||
|
Assuming
dilution
|
1,486.9
|
1,273.7
|
837.6
|
|||||||||
(See
notes to the consolidated financial statements)
70
CONSOLIDATED BALANCE
SHEETS
|
As of December
31,
|
||||||||
|
(in
millions)
|
2007
|
2006
|
||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ |
1,452
|
$ |
1,668
|
||||
|
Trade
accounts receivable, net
|
1,502
|
1,388
|
||||||
|
Inventories
|
725
|
684
|
||||||
|
Deferred
income taxes
|
679
|
369
|
||||||
|
Assets
held for sale
|
1,099
|
1,447
|
||||||
|
Prepaid
expenses and other current assets
|
464
|
474
|
||||||
|
Total current
assets
|
$ |
5,921
|
$ |
6,030
|
||||
|
Property,
plant and equipment, net
|
1,735
|
1,644
|
||||||
|
Investments
|
317
|
596
|
||||||
|
Other
assets
|
157
|
234
|
||||||
|
Intangible
assets
|
||||||||
|
Goodwill
|
15,103
|
13,996
|
||||||
|
Core
and developed technology, net
|
6,978
|
7,330
|
||||||
|
Patents,
net
|
322
|
319
|
||||||
|
Other
intangible assets, net
|
664
|
733
|
||||||
|
Total
intangible assets
|
23,067
|
22,378
|
||||||
|
Total
assets
|
$ |
31,197
|
$ |
30,882
|
||||
(See
notes to the consolidated financial statements)
71
CONSOLIDATED BALANCE
SHEETS
|
As of December
31,
|
||||||||
|
(in
millions, except share data)
|
2007
|
2006
|
||||||
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Current
debt obligations
|
$ |
256
|
$ |
7
|
||||
|
Accounts
payable
|
139
|
204
|
||||||
|
Accrued
expenses
|
2,541
|
1,816
|
||||||
|
Income
taxes payable
|
122
|
413
|
||||||
|
Liabilities
associated with assets held for sale
|
39
|
52
|
||||||
|
Other
current liabilities
|
153
|
139
|
||||||
|
Total current
liabilities
|
$ |
3,250
|
$ |
2,631
|
||||
|
Long-term
debt
|
7,933
|
8,895
|
||||||
|
Deferred
income taxes
|
2,284
|
2,570
|
||||||
|
Other
long-term liabilities
|
2,633
|
1,488
|
||||||
|
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 1,491,234,911 shares at December 31, 2007 and 1,486,403,445
shares at December 31, 2006
|
15
|
15
|
||||||
|
Additional
paid-in capital
|
15,788
|
15,792
|
||||||
|
Deferred
cost, ESOP
|
(22 | ) | (58 | ) | ||||
|
Treasury
stock, at cost — 11,728,643 shares at December 31,
2006
|
(334 | ) | ||||||
|
Retained
deficit
|
(693 | ) | (174 | ) | ||||
|
Accumulated
other comprehensive income (loss), net of tax
|
||||||||
|
Foreign
currency translation adjustment
|
54
|
16
|
||||||
|
Unrealized
gain on available-for-sale securities
|
16
|
16
|
||||||
|
Unrealized
(loss) gain on derivative financial instruments
|
(59 | ) |
32
|
|||||
|
Unrealized
costs associated with certain retirement plans
|
(2 | ) | (7 | ) | ||||
|
Total
stockholders’ equity
|
15,097
|
15,298
|
||||||
| $ |
31,197
|
$ |
30,882
|
|||||
(See
notes to the consolidated financial statements)
72
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY (in millions, except share data)
|
Common
Stock
|
Deferred
Cost, ESOP
|
|||||||||||||||||||||||||||||||||||||||
|
Shares
Issued
|
Par
Value
|
Additional
Paid-In Capital
|
Deferred
Compensation
|
Shares
|
Amount
|
Treasury
Stock
|
Retained
Earnings (Deficit)
|
Accumulated
Other Comprehensive Income (Loss)
|
Comprehensive
Income (Loss)
|
|||||||||||||||||||||||||||||||
|
Balance at December 31,
2004
|
844,565,292
|
$ |
8
|
$ |
1,633
|
$ | (2 | ) | $ | (320 | ) | $ |
2,790
|
$ | (84 | ) | ||||||||||||||||||||||||
|
Comprehensive
income
|
||||||||||||||||||||||||||||||||||||||||
|
Net
income
|
628
|
$ |
628
|
|||||||||||||||||||||||||||||||||||||
|
Other
comprehensive income (loss), net of
tax
|
||||||||||||||||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
(37 | ) | (37 | ) | ||||||||||||||||||||||||||||||||||||
|
Net
change in equity investments
|
24
|
24
|
||||||||||||||||||||||||||||||||||||||
|
Net
change in derivative financial instruments
|
118
|
118
|
||||||||||||||||||||||||||||||||||||||
|
Issuance
of common stock
|
(113 | ) |
207
|
|||||||||||||||||||||||||||||||||||||
|
Common
stock issued for acquisitions
|
(5 | ) |
129
|
|||||||||||||||||||||||||||||||||||||
|
Issuance
of restricted stock, net of cancellations
|
114
|
(115 | ) |
1
|
||||||||||||||||||||||||||||||||||||
|
Repurchases
of common stock
|
(734 | ) | ||||||||||||||||||||||||||||||||||||||
|
Excess
tax benefit related to stock options
|
28
|
|||||||||||||||||||||||||||||||||||||||
|
Step-up
accounting adjustment for certain investments
|
(8 | ) | ||||||||||||||||||||||||||||||||||||||
|
Amortization
of deferred compensation
|
1
|
19
|
||||||||||||||||||||||||||||||||||||||
|
Balance at December 31,
2005
|
844,565,292
|
8
|
1,658
|
(98 | ) | (717 | ) |
3,410
|
21
|
$ |
733
|
|||||||||||||||||||||||||||||
|
Comprehensive
income
|
||||||||||||||||||||||||||||||||||||||||
|
Net
loss
|
(3,577 | ) | $ | (3,577 | ) | |||||||||||||||||||||||||||||||||||
|
Other
comprehensive income (loss), net of
tax
|
||||||||||||||||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
87
|
87
|
||||||||||||||||||||||||||||||||||||||
|
Net
change in equity 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
|
|||||||||||||||||||||||||||||||||||||
|
Issuance
of common stock
|
(238 | ) |
383
|
|||||||||||||||||||||||||||||||||||||
|
Excess
tax benefit related to stock options
|
7
|
|||||||||||||||||||||||||||||||||||||||
|
Reversal
of deferred compensation in accordance
with SFAS 123(R)
|
(98 | ) |
98
|
|||||||||||||||||||||||||||||||||||||
|
Stock-compensation,
including amounts capitalized
to inventory
|
115
|
|||||||||||||||||||||||||||||||||||||||
|
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 equity investments
|
||||||||||||||||||||||||||||||||||||||||
|
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 | ) | ||||||||||||||||||||||||||||||||||||||
|
Issuance
of common stock
|
4,831,466
|
(65 | ) |
192
|
||||||||||||||||||||||||||||||||||||
|
Common
stock issued for acquisitions
|
|
(52 | ) |
142
|
||||||||||||||||||||||||||||||||||||
|
Excess
tax benefit related to stock options
|
2
|
|||||||||||||||||||||||||||||||||||||||
|
Stock-compensation,
including amounts capitalized
to inventory
|
124
|
|||||||||||||||||||||||||||||||||||||||
|
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 | ) | ||||||||||||||||||||||
(See
notes to the consolidated financial statements)
73
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
Year Ended December
31,
|
||||||||||||
|
in
millions
|
2007
|
2006
|
2005
|
|||||||||
|
Operating
Activities
|
||||||||||||
|
Net
(loss) income
|
$ | (495 | ) | $ | (3,577 | ) | $ |
628
|
||||
|
Adjustments
to reconcile net (loss) income to cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
939
|
781
|
314
|
|||||||||
|
Deferred
income taxes
|
(386 | ) | (420 | ) |
4
|
|||||||
|
Stock-compensation
expense
|
122
|
113
|
19
|
|||||||||
|
Excess
tax benefit relating to stock options
|
28
|
|||||||||||
|
Net
loss on investments and notes receivable
|
59
|
112
|
37
|
|||||||||
|
Purchased
research and development
|
85
|
4,119
|
276
|
|||||||||
|
Loss
on assets held for sale
|
560
|
|||||||||||
|
Step-up
value of acquired inventory sold
|
267
|
|||||||||||
|
Fair-value
adjustment for sharing of proceeds feature of Abbott
Laboratories stock purchase
|
8
|
95
|
||||||||||
|
Increase
(decrease) in cash flows from operating assets and liabilities,
excluding the effect of acquisitions and assets held for
sale:
|
||||||||||||
|
Trade
accounts receivable
|
(72 | ) |
64
|
(24 | ) | |||||||
|
Inventories
|
(30 | ) | (53 | ) | (77 | ) | ||||||
|
Prepaid
expenses and other assets
|
(43 | ) |
79
|
(100 | ) | |||||||
|
Accounts
payable and accrued expenses
|
45
|
(1 | ) | (162 | ) | |||||||
|
Income
taxes payable and other liabilities
|
125
|
234
|
(51 | ) | ||||||||
|
Other,
net
|
17
|
32
|
11
|
|||||||||
|
Cash
provided by operating activities
|
934
|
1,845
|
903
|
|||||||||
|
Investing
Activities
|
||||||||||||
|
Property, plant and
equipment
|
||||||||||||
|
Purchases
|
(363 | ) | (341 | ) | (341 | ) | ||||||
|
Proceeds
on disposals
|
30
|
18
|
19
|
|||||||||
|
Marketable
securities
|
||||||||||||
|
Purchases
|
(56 | ) | ||||||||||
|
Proceeds
from maturities
|
159
|
241
|
||||||||||
|
Acquisitions
|
||||||||||||
|
Payments
for acquisitions of businesses, net of cash acquired
|
(13 | ) | (8,686 | ) | (178 | ) | ||||||
|
Payments
relating to prior year acquisitions
|
(248 | ) | (397 | ) | (33 | ) | ||||||
|
Other investing
activity
|
||||||||||||
|
Purchases
of publicly traded equity securities
|
(2 | ) | (52 | ) | ||||||||
|
Payments
for investments in privately-held companies and acquisitions of certain
technologies
|
(121 | ) | (98 | ) | (156 | ) | ||||||
|
Proceeds
from sales of investments in, and collections of notes receivable from,
investment portfolio companies
|
243
|
33
|
5
|
|||||||||
|
Cash
used for investing activities
|
(474 | ) | (9,312 | ) | (551 | ) | ||||||
|
Financing
Activities
|
||||||||||||
|
Debt
|
||||||||||||
|
Net
payments on commercial paper
|
(149 | ) | (131 | ) | ||||||||
|
Payments
on notes payable, capital leases and long-term borrowings
|
(1,000 | ) | (1,510 | ) | (508 | ) | ||||||
|
Proceeds
from notes payable and long-term borrowings, net of debt issuance
costs
|
8,544
|
739
|
||||||||||
|
Net
proceeds from (payments on) borrowings on credit and security
facilities
|
246
|
3
|
(413 | ) | ||||||||
|
Equity
|
||||||||||||
|
Repurchases
of common stock
|
(734 | ) | ||||||||||
|
(Payments)
proceeds related to issuance of shares of common stock to
Abbott
|
(60 | ) |
1,400
|
|||||||||
|
Proceeds
from issuances of shares of common stock
|
132
|
145
|
94
|
|||||||||
|
Excess
tax benefit relating to stock options
|
2
|
7
|
||||||||||
|
Other,
net
|
(1 | ) | (1 | ) | ||||||||
|
Cash
(used for) provided by financing activities
|
(680 | ) |
8,439
|
(954 | ) | |||||||
|
Effect
of foreign exchange rates on cash
|
4
|
7
|
(5 | ) | ||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(216 | ) |
979
|
(607 | ) | |||||||
|
Cash
and cash equivalents at beginning of year
|
1,668
|
689
|
1,296
|
|||||||||
|
Cash and cash equivalents at
end of year
|
$ |
1,452
|
$ |
1,668
|
$ |
689
|
||||||
(See
notes to the consolidated financial statements)
74
|
Year
Ended December 31,
|
||||||||||||
|
SUPPLEMENTAL
INFORMATION:
|
2007
|
2006
|
2005
|
|||||||||
|
Cash
paid for income taxes
|
$ | 475 | $ | 199 | $ | 350 | ||||||
|
Cash
paid for interest
|
543 | 383 | 87 | |||||||||
|
Non-cash investing
activities:
|
||||||||||||
|
Stock
and stock equivalents issued for acquisitions
|
$ | 90 | $ | 12,964 | $ | 124 | ||||||
|
Non-cash financing
activities:
|
||||||||||||
|
Capital
lease arrangements
|
$ | 31 | ||||||||||
(See
notes to the consolidated financial statements)
75
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 and Accounting Research Bulletin
No. 51, Consolidation of
Financial Statements, 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, 2007, 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.
On April
21, 2006, we consummated our acquisition of Guidant Corporation. We consolidated
Guidant’s operating results with those of Boston Scientific beginning on the
date of the acquisition. See Note C - Acquisitions for
further details regarding the transaction.
Reclassifications
We have
reclassified certain prior year amounts to conform to the current year’s
presentation, including amounts for prior years included in the consolidated
balance sheets with respect to assets held for sale and associated liabilities,
as well as Note B –
Supplemental Balance Sheet Information, Note D – Goodwill and Other Intangible
Assets, and Note P – Segment
Reporting.
Accounting
Estimates
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 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 an original maturity date of three months or less to be cash
equivalents.
We invest
excess cash in high-quality marketable securities consisting primarily of bank
time deposits. 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 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, 2007 and 2006 had
maturity dates at date of purchase of less than three months and, accordingly,
we have classified them as cash and cash equivalents. Interest income earned
from cash and cash equivalent investments was $79 million in 2007, $67 million
in 2006, and $36 million in 2005.
Concentrations of Credit
Risk
Financial
instruments that potentially subject us to concentrations of credit risk consist
primarily of cash and
76
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 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. 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. We recognize revenue from consignment arrangements based on
product usage, or implant, which indicates that the sale is complete. For all
other transactions, we recognize revenue when title to the goods and risk of
loss transfer to the customer, provided there are no substantive remaining
performance obligations required of us or any matters requiring customer
acceptance. For multiple-element arrangements, whereby the sale of devices is
combined with future service obligations, 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
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 generated 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, obsolete or expired inventory primarily on our estimates
of forecasted net sales and production levels. 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, obsolete or expired
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 the
estimates related to excess and obsolete inventory. We record provisions for
inventory located in our manufacturing and distribution facilities as cost of
sales. We charge consignment inventory write-downs to selling, general and
administrative expense. These write-downs approximated $35 million in 2007,
$24 million in 2006, and $15 million in 2005. Inventories under
consignment arrangements were approximately $78 million at December 31, 2007 and
$47 million at December 31, 2006.
77
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. 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. As of December 31, 2007, the cost of each of our
acquired entities exceeded the fair value amounts assigned to assets acquired
and liabilities assumed.
Purchased Research and
Development
Our
purchased research and development represents the estimated fair value of
acquired in-process projects that have not yet reached technological feasibility
and have no alternative future use 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. We expense the value attributable to these in-process
projects at the time of the acquisition. 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 acquisitions 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
78
discount
rates to discount our projected cash flows: 19 percent in 2007, 13 percent to 17
percent in 2006, and 18 percent to 27 percent in 2005. 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. We amortize our intangible assets using
the straight-line method over their estimated useful lives, 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 would indicate impairment and trigger a
more frequent impairment assessment include, but are not limited to, a
significant adverse change in legal factors or business climate that could
affect the value of an asset, or an adverse action or assessment by a regulator.
If an impairment indicator exists, and the carrying value of an asset exceeds
its undiscounted cash flows, we write down the carrying value of the intangible
asset to its fair value in the period identified. We calculate fair value
generally as the present value of estimated future cash flows we expect to
generate from the asset using a risk-adjusted discount rate. We record
impairments of intangible assets as amortization expense in our consolidated
statements of operations. 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 estimate of an intangible
asset’s remaining useful life is changed, we amortize the remaining carrying
value of the intangible asset prospectively over the revised remaining useful
life.
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.
Goodwill
Impairment
Annually
we test our goodwill balances during the second quarter of the year as of April
1, the beginning of our second quarter, using financial information available at
that time. We test our goodwill balances more frequently if certain 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. In 2007 and 2006,
we identified our ten domestic divisions, which in aggregate make up the U.S.
reportable segment, and our three international operating segments as our
reporting units for purposes of the goodwill impairment test. 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 June 30
interim financial statements and disclose that the
79
amount is
an estimate. We would then recognize any adjustment to that estimate
in subsequent reporting periods, once we finalized the second step of the
impairment test.
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. 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.
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; 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 these 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 $1.605 billion at December 31,
2007 and $2.201 billion at December 31, 2006. 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.
80
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
$7.804 billion at December 31, 2007 and $7.186 billion at
December 31, 2006.
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.
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 general and
product liability claims. We maintain insurance policies providing limited
coverage against securities claims. We 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 the
years ended December 31, 2007 and 2006 consisted of the following (in
millions):
81
|
Balance
at January 1, 2006
|
$ | 12 | ||
|
Guidant
warranty provision assumed
|
50 | |||
|
Warranty
claims provision
|
28 | |||
|
Settlements
made
|
(30 | ) | ||
|
Balance
at December 31, 2006
|
60 | |||
|
Warranty
claims provision
|
23 | |||
|
Settlements
made
|
(17 | ) | ||
|
Balance
at December 31, 2007
|
$ | 66 |
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 when management approves and commits to a plan of termination, and
communicates the termination arrangement to the employees, or over the future
service period, if any. 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, we
account for costs to exit an activity of an acquired
company and 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 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. We recognize
involuntary employee termination benefits and relocation costs as liabilities
assumed as of the acquisition date when management approves and commits to a
plan of termination, and communicates the termination arrangement to the
employees.
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. These gains and
losses were not material to our consolidated statements of operations for 2007,
2006, and 2005.
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
82
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.
The
carrying amount of credit facility borrowings approximates their fair values at
December 31, 2007. We base the fair value of our fixed-rate long-term debt on
market prices to the extent we hedge changes in their fair values. Carrying
amounts of floating-rate long-term debt approximate their fair value at December
31, 2007 and 2006.
Shipping and Handling
Costs
We do not
generally bill customers for shipping and handling of our products. Shipping and
handling costs of $92 million in 2007, $108 million in 2006 and
$92 million in 2005 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
former U.S. and Puerto Rico employees of Guidant were eligible to receive
Company-paid healthcare retirement benefits. As part of the Guidant
integration and the effort to develop a more scalable, consistent benefit plan,
these benefits were frozen. Former Guidant employees that met certain
criteria as of December 31, 2006 and retire within two years thereafter are
eligible to receive the benefits under the plan.
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 2.5 months of salary for each
completed year of service, up to a maximum of 36 months’ pay. 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.
We use a
December 31 measurement date for these plans. In accordance with FASB
Statement No. 158, Employer’s
Accounting for Defined Benefit Pension and Other Postretirement Plans, we
record the overfunded portion of each plan as an asset in our consolidated
balance sheets, the underfunded portion as a liability, and recognize changes in
the funded status through other comprehensive income. The outstanding
obligation as of December 31, 2007 is as follows:
83
|
(in
millions)
|
Executive
Retirement
Plan
|
Guidant
Retirement
Plan
(frozen)
|
Guidant
Excess
Benefit
Plan
(frozen)
|
Healthcare
Retirement
Benefit
Plan
(frozen)
|
Total
|
|||||||||||||||
|
Projected
benefit obligation (PBO)
|
$ | 20 | $ | 82 | $ | 28 | $ | 36 | $ | 166 | ||||||||||
|
Less:
Fair value of plan assets
|
86 | 86 | ||||||||||||||||||
|
Underfunded
(overfunded) PBO recognized
|
$ | 20 | $ | (4 | ) | $ | 28 | $ | 36 | $ | 80 | |||||||||
The net decrease in the funded status of our plans from December 31, 2006 was $5 million and is included in accumulated other comprehensive income.
The
weighted average assumptions used to determine benefit obligations at December
31, 2007 are as follows:
|
Executive
Retirement
Plan
|
Guidant
Retirement
Plan
(frozen)
|
Guidant
Excess
Benefit
Plan
(frozen)
|
Healthcare
Retirement
Benefit
Plan
(frozen)
|
|
|
Discount
rate
|
6.50%
|
6.50%
|
6.50%
|
5.50%
|
|
Expected
return on plan assets
|
7.75%
|
|||
|
Healthcare
cost trend rate
|
5.00%
|
|||
|
Expected
rate of compensation increase
|
4.50%
|
Defined Contribution Plans
We
sponsor a voluntary 401(k) retirement savings plan for eligible employees.
Participants may contribute between one percent and ten percent of his or her
compensation 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 employee
compensation. Total expense for our matching contributions to the plan was $43
million in 2007, $40 million in 2006 and $41 million in
2005.
In
connection with our acquisition of Guidant, we now sponsor the Guidant Employee
Savings and Stock Ownership Plan, which allows for employee contributions of up
to 75 percent of pre-tax earnings, up to established federal limits.
Our matching contributions to the plan are 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 $23 million in 2007 and $19 million in
2006.
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
84
|
As
of December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Trade
accounts receivable, net
|
||||||||
|
Accounts
Receivable
|
$ | 1,639 | $ | 1,523 | ||||
|
Less:
allowances
|
137 | 135 | ||||||
| $ | 1,502 | $ | 1,388 | |||||
|
Inventories
|
||||||||
|
Finished
goods
|
$ | 454 | $ | 417 | ||||
|
Work-in-process
|
132 | 132 | ||||||
|
Raw
materials
|
139 | 135 | ||||||
| $ | 725 | $ | 684 | |||||
|
Property,
plant and equipment, net
|
||||||||
|
Land
|
$ | 119 | $ | 107 | ||||
|
Buildings
and improvements
|
822 | 694 | ||||||
|
Equipment,
furniture and fixtures
|
1,680 | 1,486 | ||||||
|
Capital
in progess
|
304 | 272 | ||||||
| 2,925 | 2,559 | |||||||
|
Less:
accumulated depreciation
|
1,190 | 915 | ||||||
| $ | 1,735 | $ | 1,644 | |||||
|
Accrued
expenses
|
||||||||
|
Acquisition-related
obligations
|
$ | 699 | $ | 428 | ||||
|
Legal
reserves
|
499 | 268 | ||||||
|
Payroll
and related liabilities
|
498 | 450 | ||||||
|
Restructuring
liabilities
|
137 | |||||||
|
Other
|
708 | 670 | ||||||
| $ | 2,541 | $ | 1,816 | |||||
|
Other
long-term liabilities
|
||||||||
|
Acquisition-related
obligations
|
$ | 465 | ||||||
|
Legal
reserves
|
495 | $ | 217 | |||||
|
Other
accrued income taxes
|
1,344 | 1,041 | ||||||
|
Other
long-term liabilities
|
329 | 230 | ||||||
| $ | 2,633 | $ | 1,488 | |||||
See Note D - Goodwill and Other
Intangible Assets for details on our intangible assets and Note E – 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—Acquisitions
During
2007, we paid approximately $100 million through a combination of cash and
common stock to acquire EndoTex Interventional Systems, Inc. and $70 million 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. During 2005, we paid $178 million in cash to
acquire TriVascular, Inc., CryoVascular Systems, Inc. and Rubicon
Medical Corporation and paid approximately $120 million in shares of our
common stock to acquire Advanced Stent Technologies, Inc.
Our
consolidated financial statements include the operating results for each
acquired entity from its
85
respective date of acquisition. Pro forma information for 2006 and 2005
related to our acquisition of Guidant is included in the section that follows.
We do not present pro forma information for our 2007 or 2005 acquisitions given
the immateriality of their results to our consolidated financial
statements.
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 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 Cardiac Rhythm Management (CRM) product line.
2006
Acquisitions
On April
21, 2006, we acquired 100 percent of the fully diluted equity of Guidant
Corporation. The aggregate purchase price of $28.4 billion included: $14.5
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
86
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 H - 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.
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. 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, Labour 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 must sell all of these shares of our common
stock no later than 30 months following the April 21, 2006 acquisition date, and
must 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 Boston Scientific (sharing of proceeds
feature). As of December 31, 2007, Abbott had sold approximately 38 million
shares of our common stock. Abbott sold its remaining shares of our
common stock during the first quarter of 2008.
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 revalue 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. As
of December 31, 2007, due to our stock price, and the remaining term of the
feature being less than one year, there was no fair value associated with this
feature.
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.
87
|
BSX
stock price
|
$ | 22.49 | ||
|
Expected
volatility
|
30.00 | % | ||
|
Risk-free
interest rate
|
4.90 | % | ||
|
Credit
spread
|
0.35 | % | ||
|
Expected
dividend yield
|
0.00 | % | ||
|
Contractual
term to expiration (years)
|
2.5 |
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 will 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 will 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 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. These
transition services are available at prices based on costs incurred in
performing the services. Substantially all of these transition services
agreements expired during 2007.
Purchase
Price
We have
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 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 | |||
| $ | 28,358 | |||
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
88
expected
dividends and the following weighted-average assumptions:
|
Expected
term (in years)
|
2.4
|
|
Expected
volatility
|
30%
|
|
Risk
free interest rate
|
4.92%
|
|
Stock
price on date of grant
|
$22.49
|
|
Weighted-average
exercise price
|
$13.11
|
Purchase Price
Allocation
The
following summarizes the Guidant purchase price allocation (in
millions):
|
Cash
|
$ | 6,708 | ||
|
Intangible
assets subject to amortization
|
7,719 | |||
|
Goodwill
|
12,570 | |||
|
Other
assets
|
2,375 | |||
|
Purchased
research and development
|
4,169 | |||
|
Current
liabilities
|
(1,973 | ) | ||
|
Net
deferred income taxes
|
(2,432 | ) | ||
|
Exit
and other costs
|
(163 | ) | ||
|
Other
long-term liabilities
|
(701 | ) | ||
|
Deferred
cost, ESOP
|
86 | |||
| $ | 28,358 |
Adjustments
to the purchase price allocation in 2007 consisted primarily of changes in our
estimates for the costs associated with product liability claims and litigation;
adjustments in taxes payable and deferred income taxes, including changes in the
liability for unrecognized tax benefits resulting from the adoption of FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes; as well as reductions in our estimate for Guidant-related exit
costs, as described below. The deferred tax liabilities relate primarily to
the tax impact of future amortization associated with the identified intangible
assets acquired, which are not deductible for tax purposes.
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
|
$ | 12,570 | ||||||||||
89
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:
|
·
|
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.
|
The
products marketed at the date of acquisition included products primarily within
the Insignia®, Prizm, Vitality®, Contak TR® and Contak Renewal® CRM product
families, the VASOVIEW® Endoscopic Vein
Harvesting System, FLEX Microwave Systems and the ACROBAT® System. We
sold the Cardiac Surgery business we acquired with Guidant in a separate
transaction in 2008. Refer to Note E– 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.
Pro Forma Results of
Operations
The
following unaudited pro forma information presents a summary of consolidated
results of our operations
90
and
Guidant’s, as if the acquisition, the Abbott transaction and the financing for
the acquisition had occurred at the beginning of each of the periods presented.
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 each of the periods presented.
Pro forma adjustments are tax-effected at our effective tax rate.
|
Year
Ended December 31,
|
||||||||
|
in
millions, except per share data
|
2006
|
2005
|
||||||
|
(unaudited)
|
||||||||
|
Net
sales
|
$ | 8,533 | $ | 8,739 | ||||
|
Net
loss
|
(3,916 | ) | (4,287 | ) | ||||
|
Net
loss per share - basic
|
$ | (2.66 | ) | $ | (2.92 | ) | ||
|
Net
loss per share - assuming dilution
|
$ | (2.66 | ) | $ | (2.92 | ) | ||
The
unaudited pro forma net loss for both periods presented 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 $163 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 continue to make
severance, relocation and change-in-control payments. The majority of the exit
cost accrual relates 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, we reduced our estimate for
Guidant-related exit costs in accordance with Issue No. 95-3. At December 31,
2007 we had remaining an accrual for $26 million in acquisition-related costs
that includes approximately $17 million for involuntary terminations,
change-in-control payments, relocation and related costs, and approximately $9
million of estimated costs to cancel contractual commitments. We expect that
substantially all of the amounts accrued at December 31, 2007 will be paid
within the next twelve months.
A
rollforward of the components of our accrual for Guidant-related exit and other
costs is as follows:
91
|
Workforce
Reductions
|
Relocation
Costs
|
Contractual
Commitments
|
Total
|
|||||||||||||
|
Balance
at January 1, 2006
|
||||||||||||||||
|
Purchase
price adjustments
|
$ | 190 | $ | 15 | $ | 30 | $ | 235 | ||||||||
|
Charges
utilized
|
(27 | ) | (5 | ) | (5 | ) | (37 | ) | ||||||||
|
Balance
at December 31, 2006
|
163 | 10 | 25 | 198 | ||||||||||||
|
Purchase
price adjustments
|
(63 | ) | (2 | ) | (7 | ) | (72 | ) | ||||||||
|
Charges
utilized
|
(85 | ) | (6 | ) | (9 | ) | (100 | ) | ||||||||
|
Balance
at December 31, 2007
|
$ | 15 | $ | 2 | $ | 9 | $ | 26 | ||||||||
2005 Acquisitions
In
March 2005, we acquired 100 percent of the fully diluted equity of
Advanced Stent Technologies, Inc. (AST) for approximately 3.6 million
shares of our common stock, valued at approximately $120 million on the
date of acquisition, plus potential future payments contingent upon certain
regulatory and performance-related milestones. AST is a developer of stent
delivery systems that are designed to address coronary artery disease in
bifurcated vessels. The acquisition was intended to provide us with an expanded
stent technology and intellectual property portfolio. In connection
with our expense and head count reduction plan discussed in our Management's
Discussion and Analysis included in Item 7 of this Form 10-K, during 2007, we
decided to suspend further significant funding of research and development
associated with this project and may or may not decide to pursue its completion.
As a result, we recorded a charge of $21 million to amortization expense in
2007, related to the impairment of the remaining AST intangible
assets.
In
April 2005, we acquired 100 percent of the fully diluted equity of
TriVascular, Inc. for approximately $65 million, in addition to our
previous investments and notes issued of approximately $45 million.
TriVascular is a developer of medical devices and procedures used for treating
abdominal aortic aneurysms (AAA). The acquisition was intended to expand our
vascular surgery technology portfolio. During 2006, management cancelled the
TriVascular AAA stent-graft program. The program cancellation was due
principally to forecasted increases in time and costs to complete the
development of the stent-graft and to receive regulatory approval. The
cancellation of the TriVascular AAA program resulted in the shutdown of our
facility in Santa Rosa, California. During 2006, we recorded charges to research
and development expenses of approximately $20 million associated primarily with
write-downs of fixed assets, and $10 million associated with severance and
related costs incurred in connection with the cancellation of the program. In
addition, we recorded an impairment charge related to the remaining TriVascular
intangible assets and reversed our accrual for contingent payments recorded in
the initial purchase accounting. The effect of the write-off of these assets and
liabilities was a $23 million charge to amortization expense and a $67 million
credit to purchased research and development during 2006.
In
April 2005, we acquired 100 percent of the fully diluted equity of
CryoVascular Systems, Inc. for approximately $50 million, in addition to
our previous investments of approximately $10 million and potential future
earn-out payments contingent upon CryoVascular achieving certain
performance related-milestones. CryoVascular is a developer and manufacturer of
a proprietary angioplasty device to treat atherosclerotic disease of the legs
and other peripheral arteries, which we previously distributed. The acquisition
was intended to expand our peripheral vascular technology
portfolio.
In
June 2005, we completed our acquisition of 100 percent of the fully
diluted equity of Rubicon Medical Corporation for approximately
$70 million, in addition to our previous investments of approximately
$20 million. We may also be required to make earn-out payments in the
future that are contingent upon Rubicon achieving certain regulatory and
performance related-milestones. Rubicon is a developer of embolic protection
filters for use in interventional cardiovascular procedures. The acquisition was
intended to strengthen our leadership position in interventional cardiovascular
procedures. In 2006, we wrote off $21 million of the intangible assets to
amortization expense associated with developed technology obtained as part of
the acquisition. The write-off of the Rubicon developed technology resulted from
a management decision to redesign the first generation of the technology and
concentrate resources on the commercialization of the second-generation
product.
92
Contingent
Consideration
Certain
of our business combinations involve the payment of contingent consideration.
Payment of the additional consideration is generally contingent upon the
acquired companies’ reaching certain performance milestones, including attaining
specified revenue levels, achieving product development targets or obtaining
regulatory approvals.
During
2007, we paid $248 million for acquisition-related payments associated primarily
with Advanced Bionics, for 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 and Smart
Therapeutics, Inc. As of December 31, 2005, we had accrued
$268 million for acquisition-related payments. During 2005, we paid
$33 million for acquisition-related payments associated primarily with
Catheter Innovations, Inc., Smart and Embolic
Protection, Inc.
Certain
of our acquisitions involve the payment of contingent consideration, some of
which are based on the acquired company’s revenue during the earn-out period.
Consequently, we cannot currently determine the total payments; however, we have
developed an estimate of the maximum potential contingent consideration for each
of our acquisitions with an outstanding earn-out obligation. 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, with certain milestones tied to profitability. We
estimated that these payments could amount to as much as $2.0 billion through
2013. The amended agreement provides a new schedule of consolidated, fixed
payments, consisting of $650 million that was paid upon closing 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, $465 million
of which is classified as long-term. These payments will be the final payments
made to Advanced Bionics. See Note E – Assets Held for Sale
for further discussion of the amendment. As of December 31, 2007, the
estimated maximum potential amount of future contingent consideration
(undiscounted) that we could be required to make associated with our other
business combinations, some of which may be payable in common stock, is
approximately $1.1 billion. The milestones associated with the contingent
consideration must be reached in certain future periods ranging from 2008
through 2022. The estimated cumulative specified revenue level associated with
these maximum future contingent payments is approximately $3.4
billion.
Purchased Research and
Development
In 2007,
we recorded $85 million of purchased research and development, including $75
million associated with our acquisition of Remon, $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.
The $75
million of in-process research and development acquired with Remon consists of a
pressure-sensing system development project, which will be combined with our
existing CRM devices. As of December 31, 2007, 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 2013 in Europe and
certain other international countries, and in the U.S. in 2016, subject to
regulatory approval. We expect material net cash inflows from such products to
commence in 2016, following the launch of this technology in the
U.S.
93
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 our investment in EndoTex.
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 products 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 that represents 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 is dependent on future
research and development activity and regulatory approvals, and the asset had no
alternative future use as of the acquisition date. We will recognize the
milestone payments, if received, as a gain in our financial statements at the
time of receipt.
The most
significant purchased research and development projects acquired from Guidant
include 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. The next-generation products using this
platform include the COGNISÔ CRT-D device, the
TELIGENÔ ICD
device and the INGENIOÔ pacemaker system.
During the first quarter of 2008, we received CE Mark approval for our COGNIS
CRT-D device, which includes defibrillation capability, and the TELIGEN ICD
device, and expect a full European launch by the end of the second quarter of
2008. We expect a U.S. launch of the COGNIS and TELIGEN devices in
the second half of 2008, following regulatory approval. We expect to launch the
INGENIO device in both Europe and the U.S. in the second half of
2010. As of December 31, 2007, we estimate that the total cost to
complete the COGNIS and TELIGEN technology is between $25 million and $35
million, and the cost to complete the INGENIO technology is between $30 million
and $35 million. We expect material net cash inflows from the COGNIS and TELIGEN
devices to commence in the second half of 2008 and material net cash inflows
from the INGENIO device to commence in the second half of 2010.
The $540
million attributable to the 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, which is a private-labeled
XIENCE™ V
drug-eluting 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. In June 2007, Abbott submitted the final module of a
pre-market approval (PMA) application to the FDA seeking approval in the U.S.
for both the XIENCE V and PROMUS stent systems. In November 2007, the FDA
advisory panel reviewing Abbott’s PMA submission voted to recommend the stent
systems for approval. Following FDA approval, which Abbott is expecting in the
first half of 2008, we plan to launch the PROMUS stent system in the U.S. We
expect to launch an internally developed and manufactured next-generation
everolimus-based stent in Europe in late 2009 or early 2010 and in the U.S. in
late 2012 or early 2013. We expect that material net cash inflows from our
internally developed and manufactured everolimus-based drug-eluting stent will
commence in 2013, following its approval in the U.S. As of December 31, 2007, we
estimate that the cost to complete our internally manufactured next-generation
everolimus-eluting stent technology project is between $200 million and $250
million.
In 2005,
we recorded $276 million of purchased research and development, consisting of
$130 million relating to our acquisition of TriVascular, $73 million relating to
our acquisition of AST, $45 million relating to our acquisition of Rubicon, and
$3 million relating to our acquisition of CryoVascular. In addition, we recorded
94
$25
million of purchased research and development in conjunction with a product
development agreement formed with Aspect Medical Systems, one of our strategic
partners, for new brain monitoring technology that Aspect has been developing.
In 2007, we terminated this agreement and recognized a credit of $15 million to
purchased research and development, representing future payments that we would
have been obligated to make prior to the termination of the
agreement.
The most
significant 2005 purchased research and development projects included
TriVascular’s AAA stent-graft and AST’s Petal™ bifurcation stent, which
collectively represented 73 percent of our 2005 purchased research and
development. During 2006, management cancelled the TriVascular AAA stent-graft
program. In addition, as previously noted, during 2007, we decided to suspend
further significant funding of research and development associated with the
Petal stent project and may or may not decide to pursue its completion. In
connection with the cancellation of the TriVascular AAA program, we recorded a
$67 million credit to purchased research and development in 2006, representing
the reversal of our accrual for contingent payments recorded in the initial
purchase accounting.
Note D—Goodwill and Other
Intangible Assets
The gross
carrying amount of goodwill and intangible assets and the related accumulated
amortization for intangible assets subject to amortization is as
follows:
|
As of December 31,
2007
|
As of December 31,
2006
|
|||||||||||||||
|
(in
millions)
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
||||||||||||
|
Amortizable intangible
assets
|
||||||||||||||||
|
Technology
- core
|
$ |
6,596
|
$ |
526
|
$ |
6,541
|
$ |
264
|
||||||||
|
Technology
- developed
|
1,096
|
515
|
1,116
|
390
|
||||||||||||
|
Patents
|
579
|
257
|
562
|
243
|
||||||||||||
|
Customer
relationships
|
674
|
91
|
682
|
41
|
||||||||||||
|
Other
intangible assets
|
132
|
51
|
211
|
119
|
||||||||||||
| $ |
9,077
|
$ |
1,440
|
$ |
9,112
|
$ |
1,057
|
|||||||||
|
Unamortizable intangible
assets
|
||||||||||||||||
|
Goodwill
|
$ |
15,103
|
$ |
13,996
|
||||||||||||
|
Technology
- core
|
327
|
327
|
||||||||||||||
| $ |
15,430
|
$ |
14,323
|
|||||||||||||
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 interventional cardiology 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, 2007 is as follows:
95
|
Fiscal
Year
|
Estimated
Amortization
Expense
(in
millions)
|
|||
|
2008
|
$ |
530
|
||
|
2009
|
509
|
|||
|
2010
|
494
|
|||
|
2011
|
400
|
|||
|
2012
|
357
|
|||
Goodwill
as of December 31 as allocated to our reportable segments is presented
below. During 2007, 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 2006 and 2005 goodwill
balances and activity by segment to be consistent with the 2007
presentation.
|
(in
millions)
|
United
States
|
Europe
|
Asia
Pacific
|
Inter-
Continental
|
Total
|
|||||||||||||||
|
Balance as of December 31,
2005
|
$ |
1,613
|
$ |
182
|
$ |
97
|
$ |
46
|
$ |
1,938
|
||||||||||
|
Purchase
price adjustments
|
(4 | ) |
|
|
|
(4 | ) | |||||||||||||
|
Goodwill
acquired
|
7,642
|
3,626
|
674
|
412
|
12,354
|
|||||||||||||||
|
Contingent
consideration
|
278
|
39
|
13
|
10
|
340
|
|||||||||||||||
|
Balance as of December 31,
2006
|
9,529
|
3,847
|
784
|
468
|
14,628
|
|||||||||||||||
|
Purchase
price adjustments
|
77
|
53
|
8
|
4
|
142
|
|||||||||||||||
|
Goodwill
acquired
|
34
|
9
|
5
|
4
|
52
|
|||||||||||||||
|
Contingent
consideration
|
924
|
130
|
53
|
39
|
1,146
|
|||||||||||||||
|
Goodwill
written-off
|
(478 | ) | (43 | ) | (18 | ) | (13 | ) | (552 | ) | ||||||||||
|
Balance as of December 31,
2007
|
$ |
10,086
|
$ |
3,996
|
$ |
832
|
$ |
502
|
$ |
15,416
|
||||||||||
The 2007
purchase price adjustments related primarily to changes in our estimates for the
costs associated with Guidant product liability claims and litigation;
adjustments in taxes payable and deferred income taxes, including changes in the
liability for unrecognized tax benefits resulting from the adoption of FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes; as well as reductions in our estimate for Guidant-related exit
costs. The 2006 purchase price adjustments relate primarily to
adjustments to reflect properly the fair value of deferred tax assets and
liabilities acquired in connection with 2006 and prior year
acquisitions.
During
2007, we determined that certain of our businesses were no longer strategic to
our on-going operations. Therefore, we initiated processes to sell these
businesses in 2007, and completed their sale in the first
quarter of 2008. During 2007, in conjunction with the
anticipated sales of our Auditory, Cardiac Surgery and Vascular Surgery
businesses, we recorded $552 million of goodwill write-downs 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 E – 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
following table reconciles the goodwill rollforward above to the goodwill as
presented in our consolidated balance sheets:
96
|
(in
millions)
|
United
States
|
Europe
|
Asia
Pacific
|
Inter-
Continental
|
Total
|
|||||||||||||||
|
December 31, 2006 balance
per above table
|
$ |
9,529
|
$ |
3,847
|
$ |
784
|
$ |
468
|
$ |
14,628
|
||||||||||
|
Less:
Balance included in assets held for sale
|
602 | 18 | 7 | 5 | 632 | |||||||||||||||
|
December 31, 2006 balance
in consolidated balance sheets
|
$ |
8,927
|
$ |
3,829
|
$ |
777
|
$ |
463
|
$ |
13,996
|
||||||||||
|
December 31, 2007 balance
per above table
|
$ |
10,086
|
$ |
3,996
|
$ |
832
|
$ |
502
|
$ |
15,416
|
||||||||||
|
Less:
Balance included in assets held for sale
|
311 | 1 | 1 | 313 | ||||||||||||||||
|
December 31, 2007 balance
in consolidated balance sheets
|
$ |
9,775
|
$ |
3,995
|
$ |
832
|
$ |
501
|
$ |
15,103
|
||||||||||
Note E—Assets Held for
Sale
During
2007, we determined that our Auditory, Cardiac Surgery, Vascular
Surgery, Fluid Management and Venous Access businesses were no longer
strategic to our ongoing operations. Therefore, we initiated the process to sell
these businesses in 2007, and completed their sale in the first quarter of 2008.
The sale of these disposal groups will help 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), and have 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. Each transaction is discussed below in further
detail.
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, fixed payments to 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.
In
conjunction with the amended merger agreement, we entered a definitive agreement
to sell 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. The sale, consummated in
January 2008, will help allow us to better focus on the retained Pain Management
business and emerging indications program acquired with Advanced Bionics. 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 in 2007, representing
primarily a write-down of goodwill. Under the terms of the agreement, we will
retain a twelve percent 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 will account for these investments using
the equity method of accounting.
Cardiac Surgery and Vascular
Surgery
In
January 2008, we completed the joint sale of our Cardiac Surgery and Vascular
Surgery businesses to the Getinge Group for a cash price of $750 million, before
adjustment for certain working capital items. To adjust
97
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
expect to record a tax expense of approximately $50 million in the first quarter
of 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 C –
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 Avista Capital Partners for a cash price of $425 million. We
expect to record a pre-tax gain of approximately $230 million during the first
quarter of 2008 associated with this transaction. We have not adjusted 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, exceeds its carrying value. 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.
The
combined assets held for sale and liabilities associated with the assets held
for sale included in the accompanying consolidated balance sheets attributable
to these disposal groups consist of the following:
|
As
of December 31,
|
||||||||
|
(in
millions)
|
2007
|
2006
|
||||||
|
Trade
accounts receivable, net
|
$ | 41 | $ | 36 | ||||
|
Inventories
|
71 | 65 | ||||||
|
Prepaid
expenses and other current assets
|
3 | 3 | ||||||
|
Property,
plant and equipment, net
|
87 | 82 | ||||||
|
Goodwill
|
313 | 632 | ||||||
|
Other
intangible assets, net
|
581 | 626 | ||||||
|
Other
long-term assets
|
3 | 3 | ||||||
|
Assets
held for sale
|
$ | 1,099 | $ | 1,447 | ||||
|
Accounts
payable and accrued expenses
|
$ | 32 | $ | 47 | ||||
|
Other
current liabilities
|
6 | 4 | ||||||
|
Other
non-current liabilities
|
1 | 1 | ||||||
|
Liabilities
associated with assets held for sale
|
$ | 39 | $ | 52 | ||||
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 December 31, 2006 balances presented are for comparative
purposes and were not classified as held for sale at that date.
The
combined 2007 revenues associated with the disposal groups were $553 million, or
seven percent of our net sales.
Note F – 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 the second quarter of 2007, we announced our decision to monetize the
majority of our investment portfolio in order to eliminate investments
determined to be non-strategic. During 2007, we
98
received
$200 million of proceeds from sales of available-for-sale securities and
recognized associated gross gains of $41 million and gross losses of $2
million. We received approximately $19 million of proceeds from sales
of privately held investments and other cash distributions, and recognized net
gains on sales of privately held investments of $10 million. We intend to
monetize the rest of our non-strategic portfolio investments over the next
several quarters. In addition, during 2007, we received proceeds of
approximately $24 million and recognized a gain of $14 million associated with
the collection of a note receivable from one of our privately held investees,
which had been written down in a prior year.
We
regularly review our investments for impairment indicators. Based on this
review, we recorded other-than-temporary impairments in 2007 of approximately
$65 million associated with our privately held investments, and $44 million
associated with our publicly traded investments. We recorded
other-than-temporary impairments of $78 million in 2006 related primarily
to technological delays and financial deterioration of certain of our
investments in vascular sealing and gene therapy portfolio companies. We
recorded other-than-temporary impairments of $10 million in 2005 associated
with certain cost method investments. In addition, during 2005, we wrote-off our
$24 million investment in Medinol, Ltd. We canceled our equity investment
in conjunction with the litigation settlement with Medinol. The write-down of
the Medinol investment is included in litigation-related charges in 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 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)
|
2007
|
2006
|
||||||
|
Available-for-sale
investments
|
||||||||
|
Carrying
value
|
$ |
18
|
$ |
120
|
||||
|
Gross
unrealized gains
|
26
|
36
|
||||||
|
Gross
unrealized losses
|
(10 | ) | ||||||
|
Fair
value
|
44
|
146
|
||||||
|
Equity method
investments
|
||||||||
|
Carrying
value
|
60
|
95
|
||||||
|
Cost method
investments
|
||||||||
|
Carrying
value
|
213
|
355
|
||||||
| $ |
317
|
$ |
596
|
|||||
As of
December 31, 2007, we held $60 million of investments that we accounted for
under the equity method. Our ownership percentages in these entities ranges from
approximately seven percent to 41 percent. Our share of net
earnings and losses of our equity method investees in 2007 was less than $1
million in the aggregate. As of December 31, 2007, all of our equity
method investments were with privately-held entities. The aggregate difference
between the carrying value of the investments and the value of our share in the
net assets of the investee at the time that we determined that the investments
qualified for equity method accounting was approximately $29 million. This
difference was attributable primarily to goodwill, which is not being amortized,
and purchased research and development, which we wrote off at the time of
application of the equity method of accounting.
As of
December 31, 2006, we held $95 million of investments that we accounted for
under the equity method. Our ownership percentages in these entities ranged from
approximately 21 percent to 28 percent. The aggregate value of our
equity method investments for which a quoted market price was available was
approximately $125 million, for which the associated carrying value was
approximately $77 million.
We had
notes receivable of approximately $61 million at December 31, 2007 and $113
million at December 31,
99
2006 due
from publicly traded and privately held entities. We recorded write-downs
of notes receivable of $13 million in 2007, related primarily to the
financial deterioration of certain of our privately held portfolio companies. We
recorded write-downs of notes receivable of $39 million in 2006, related
primarily to technological delays and financial deterioration of certain of our
vascular sealing and gene therapy portfolio companies, and $4 million in
2005.
Note G – Restructuring
Activities
In
October 2007, our Board of Directors approved, and we committed to, an expense
and head count reduction plan, which will result 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. As of December 31, 2007, we had completed more than half of the
anticipated head count reductions. 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 business units and product franchises in order to leverage resources,
strengthen competitive positions, and create a more simplified and efficient
business model; the elimination, suspension or reduction of spending on certain
research and development (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 completed worldwide by
the end of 2008.
We expect
that the execution of this plan will result in total pre-tax costs of
approximately $425 million to $450 million. We expect that the plan
will result in total cash outlays of approximately $400 million to
$425 million. The following table provides a summary of our estimates
of total costs associated with the plan by major type of cost:
|
Type
of cost
|
Total
amount expected to be incurred
|
|
Termination
benefits
|
$260
million to $270 million
|
|
Retention
incentives
|
$60
million to $65 million
|
|
Asset
write-offs and accelerated depreciation
|
$45
million to $50 million
|
|
Other*
|
$60
million to $65 million
|
* Other
costs consist primarily of costs to transfer product lines from one facility to
another and consultant fees.
In 2007,
we incurred total restructuring costs of $205 million. The following presents
these costs by major type and line item within our consolidated statements of
operations:
|
Termination
Benefits
|
Retention
Incentives
|
Intangible
Asset
Write-offs
|
Fixed
Asset
Write-offs
|
Accelerated
Depreciation
|
Other
|
Total
|
||||||||||||||||||||||
|
Cost
of goods sold
|
$ | 1 | $ | 1 | $ | 2 | ||||||||||||||||||||||
|
Selling,
general and adminstrative expenses
|
2 | 2 | 4 | |||||||||||||||||||||||||
|
Research
and development expenses
|
2 | 2 | ||||||||||||||||||||||||||
|
Amortization
expense
|
$ | 21 | 21 | |||||||||||||||||||||||||
|
Restructuring
charges
|
$ | 158 | $ | 8 | $ | 10 | 176 | |||||||||||||||||||||
| $ | 158 | $ | 5 | $ | 21 | $ | 8 | $ | 3 | $ | 10 | $ | 205 | |||||||||||||||
The
termination benefits recorded during 2007 represent primarily amounts incurred
pursuant to our on-going benefit arrangements, and have been recorded pursuant
to FASB Statement No. 112, Employer’s Accounting for
Postemployment Benefits. We expect to record the remaining
termination benefits in 2008 when we identify with more specificity the job
classifications, functions and locations of the remaining head count to be
eliminated. The asset write-offs relate to intangible assets and
property, plant and equipment that are not recoverable following our decision in
October 2007 to (i) commit to the expense and workforce reduction plan,
including the elimination, suspension or reduction of spending on certain
R&D projects, and (ii) restructure several businesses. The
retention incentives represent cash incentives that are being recorded
100
over the
future service period during which eligible employees must remain employed with
us to retain the payment. The other restructuring costs 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, Accounting for Costs Associated with
Exit or Disposal Activities.
Charges
associated with restructuring 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 liabilities associated with our 2007
restructuring initiatives, which are reported as a component of accrued expenses
included in our consolidated balance sheets.
|
Termination
Benefits
|
Other
|
Total
|
||||||||||
|
Balance
at January 1, 2007
|
||||||||||||
|
Charges
|
$ | 158 | $ | 10 | $ | 168 | ||||||
|
Cash
payments
|
(23 | ) | (8 | ) | (31 | ) | ||||||
|
Balance
at December 31, 2007
|
$ | 135 | $ | 2 | $ | 137 | ||||||
Note H—Borrowings and Credit
Arrangements
We had
total debt of $8.189 billion at December 31, 2007 at an average interest
rate of 6.36 percent, as compared to total debt of $8.902 billion at
December 31, 2006 at an average interest rate of 6.03 percent. Our
borrowings consist of the following:
|
As
of December 31,
|
||||||||
|
(in
millions)
|
2007
|
2006
|
||||||
|
Current debt
obligations
|
||||||||
|
Credit
and security facility
|
$ | 250 | ||||||
|
Other
|
6 | $ | 7 | |||||
| 256 | 7 | |||||||
|
Long-term debt
obligations
|
||||||||
|
Term
loan
|
4,000 | 5,000 | ||||||
|
Abbott
loan
|
900 | 900 | ||||||
|
Senior
notes
|
3,050 | 3,050 | ||||||
|
Fair
value adjustment *
|
(17 | ) | (11 | ) | ||||
|
Discounts
|
(34 | ) | (52 | ) | ||||
|
Capital
leases
|
28 | 1 | ||||||
|
Other
|
6 | 7 | ||||||
| 7,933 | 8,895 | |||||||
| $ | 8,189 | $ | 8,902 | |||||
|
*
|
Represents
unamortized losses related to interest rate swaps used to hedge the fair
value of certain of our senior notes. See Note I - Financial
Instruments for further discussion regarding the accounting
treatment of our interest rate
swaps.
|
The debt
maturity schedule for the significant components of our debt obligations as of
December 31, 2007 is as follows:
101
| Payments Due by Period | |||||||||||||||||||||||||||
|
(in
millions)
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
||||||||||||||||||||
|
Term
loan
|
$ | 300 | $ | 1,700 | $ | 2,000 | $ | 4,000 | |||||||||||||||||||
|
Abbott
loan
|
900 | 900 | |||||||||||||||||||||||||
|
Senior
notes
|
850 | $ | 2,200 | 3,050 | |||||||||||||||||||||||
|
Credit
and security facility
|
$ | 250 | 250 | ||||||||||||||||||||||||
| $ | 250 | $ | 300 | $ | 1,700 | $ | 3,750 |
|
$ | 2,200 | $ | 8,200 | |||||||||||||||
In April
2006, 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. 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.
Term Loan and Revolving Credit
Facility
In April
2006, we terminated our existing revolving credit facilities and established a
new $2.0 billion, five-year revolving credit facility. Use of the borrowings in
unrestricted and the borrowings are unsecured. There were no amounts borrowed
under this facility as of December 31, 2007 and 2006.
The term
loan and revolving credit facility bear interest at LIBOR plus an interest
margin of 1.00 percent. The interest margin is based on the highest two out of
three of our long-term, senior unsecured, corporate credit ratings from Fitch
Ratings, Moody’s Investor Service, Inc. and Standard & Poor’s Rating
Services (S&P). As of December 31, 2007, our credit ratings S&P and
Fitch were BB+, and our credit rating from Moody’s was Ba1. All of these are
below investment grade ratings and the outlook by all three rating agencies is
currently negative. 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.
We are
permitted to prepay the term loan prior to maturity with no penalty or premium.
In the third quarter of 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 Credit Facilities section for
more information on this facility). In addition, in January 2008, following the
closing of the sale of, and receipt of proceeds for, three of our businesses, we
made an additional payment of $200 million, reducing the April 2009 maturity
shown in the table above.
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 will record interest at an imputed rate of 5.25 percent over the
term of the loan.
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.
102
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. In the third quarter of 2007, we extended this facility through August
2008. There was $250 million in borrowings outstanding under this facility at
December 31, 2007 and no amounts outstanding at December 31, 2006.
Further,
we have uncommitted credit facilities with two commercial Japanese banks that
provide for borrowings and promissory notes discounting of up to 15 billion
Japanese yen (translated to approximately $133 million at December 31,
2007 and $127 million at December 31, 2006). We discounted $109 million of
notes receivable as of December 31, 2007 at an average interest rate of
1.15 percent, and $103 million as of December 31, 2006 at an average
interest rate of 0.75 percent. Discounted notes receivable are excluded
from accounts receivable in the accompanying consolidated balance
sheets.
At
December 31, 2007, we had outstanding letters of credit and bank guarantees of
approximately $110 million, which consisted primarily of financial lines of
credit provided by banks and collateral for workers’ compensation
programs. We enter these letters of credit and bank guarantees in the
normal course of business. As of December 31, 2007 and 2006, beneficiaries had
not drawn any amounts on the letters of credit or guarantees. At this time, we
do not believe we will be required to fund or draw any amounts from the
guarantees or letters of credit and, accordingly, we have not recognized a
related liability in our financial statements as of December 31, 2007 or
2006.
Senior
Notes
We had
senior notes of $3.050 billion outstanding at December 31, 2007 and
2006. 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 | ||||||||||
Debt Covenants
Our term
loan and revolving credit facility agreement requires that we maintain certain
financial covenants. During 2007, we amended certain terms contained in this
agreement. Among other items, the amendment
103
extends a
step-down in the maximum permitted ratio of debt to consolidated EBITDA, as
defined by the agreement, as follows:
|
From:
|
To:
|
|
4.5
times to 3.5 times on March 31, 2008
|
4.5
times to 4.0 times on March 31, 2009, and
|
|
4.0
times to 3.5 times on September 30,
2009
|
The
amendment also provides for an exclusion from the calculation of
consolidated EBITDA, as defined by the agreement, of up to $300 million of
restructuring charges incurred through June 30, 2009 and up to $500 million of
litigation and settlement expenses incurred (net of any litigation or settlement
income received) in any consecutive four fiscal quarters, not to exceed $1.0
billion in the aggregate, through June 30, 2009. Other than the amended
exclusions from the calculation of consolidated EBITDA, there was no change in
our minimum required ratio of consolidated EBITDA, as defined by the agreement,
to interest expense of greater than or equal to 3.0 to 1.0. As of December 31,
2007, we were in compliance with the required covenants. Exiting 2007, our ratio
of debt to consolidated EBITDA was approximately 3.6 to 1.0 and our ratio
of consolidated EBITDA to interest expense was approximately 4.0 to 1.0.
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.
Note I—Financial
Instruments
The
carrying amounts and fair values of our financial instruments are as
follows:
|
As of December 31,
2007
|
As of December 31,
2006
|
|||||||||||||||
|
(in
millions)
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||||
|
Assets
|
||||||||||||||||
|
Currency
exchange contracts
|
$ |
19
|
$ |
19
|
$ |
71
|
$ |
71
|
||||||||
|
Liabilities
|
||||||||||||||||
|
Long-term
debt
|
$ |
7,933
|
$ |
7,603
|
$ |
8,895
|
$ |
8,862
|
||||||||
|
Currency
exchange contracts
|
118
|
118
|
27
|
27
|
||||||||||||
|
Interest
rate swap contracts
|
17
|
17
|
11
|
11
|
||||||||||||
Considerable judgment is required in interpreting market data to develop estimates of fair value. Estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange due to changes in market rates since December 31, 2007.
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.
We
estimate the fair value of derivative financial instruments based on the amount
that we would receive or pay to terminate the agreements at the reporting date.
We had currency derivative instruments outstanding in the contract amounts of
$4.135 billion at December 31, 2007 and $3.413 billion at December 31,
2006. In addition, we had interest rate derivative instruments outstanding in
the notional amount of $1.5 billion at December 31, 2007, and $2.0 billion
at December 31, 2006.
104
Currency Transaction
Hedging
We manage
our currency transaction exposures on a consolidated basis to take advantage of
offsetting transactions. We 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. Changes in currency exchange rates
related to any unhedged transactions may impact our earnings and cash flows.
Currency Translation
Hedging
We 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 (loss) 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 (loss) 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 (loss) to earnings at
that time. Gains and losses from hedge ineffectiveness were immaterial in 2007,
2006 and 2005. We recognized in earnings net gains of $20 million during 2007,
$38 million during 2006, and a net loss of $12 million during 2005 on
currency derivative instruments. All cash flow hedges outstanding at
December 31, 2007 mature within 36 months. As of December 31, 2007,
$58 million of unrealized net losses are recorded in accumulated other
comprehensive loss, 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 $28 million
of net gains at December 31, 2006. At December 31, 2007,
$33 million of net losses, 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 portion of any change in the fair value of cash flow
hedges as other comprehensive income (loss), net of tax, and reclassify the
gains or losses to interest expense during the hedged interest payment
period.
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
105
net loss
of $14 million, which we recorded to the carrying amount of certain of our
senior notes. As of December 31, 2007, the carrying amount of certain of our
senior notes included $4 million of unamortized gains and $13 million of
unamortized losses, as compared to $4 million of unamortized gains and
$16 million of unamortized losses at December 31, 2006.
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, 2007, we had $10
million of unamortized gain, net of tax, recorded in accumulated other
comprehensive income, which we are amortizing into earnings over the life of the
hedged debt. At December 31, 2006, we had $11 million of unamortized
gain, net of tax, recorded in accumulated other comprehensive
income. Amounts recorded for ineffectiveness related to these
treasury locks were immaterial in 2007 and 2006.
During
2006, we entered floating-to-fixed interest rate swaps indexed to three-month
LIBOR to hedge against variability in interest payments on $2.0 billion of our
LIBOR-indexed floating-rate loans. Three-month LIBOR approximated 4.70 percent
at December 31, 2007 and 5.36 percent at December 31, 2006. These interest rate
swaps reduce by $250 million quarterly beginning in September 2007 and ending in
June 2009. As of December 31, 2007, we had interest rate derivative
instruments outstanding in the notional amount of $1.5 billion. 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 (loss), net of tax,
until the hedged cash flow occurs. At December 31, 2007, we recorded a net
unrealized loss of $11 million, net of tax, in accumulated other comprehensive
loss to recognize the fair value of these interest rate derivative instruments,
as compared to $7 million of net unrealized losses at December 31,
2006.
We
recognized $2 million of net losses in earnings related to all current and
prior interest rate derivative contracts in 2007 as compared to net
gains of $2 million in 2006 and $9 million in
2005. At December 31, 2007, $3 million of net losses may be
reclassified to earnings within the next twelve months.
Note J—Leases
Rent
expense amounted to $72 million in 2007, $80 million in 2006, and
$63 million in 2005.
Future
minimum rental commitments at December 31, 2007 under noncancelable
operating lease agreements are as follows (in millions):
|
2008
|
$ |
64
|
||
|
2009
|
49
|
|||
|
2010
|
37
|
|||
|
2011
|
24
|
|||
|
2012
|
17
|
|||
|
Thereafter
|
49
|
|||
| $ |
240
|
In 2005,
we entered a lease agreement with an entity affiliated with a
former co-chief executive officer of our Neuromodulation operations to
construct a new manufacturing facility for that business. Under the amended
Advanced Bionics merger agreement discussed in Note E – Assets Held for
Sale, we will retain the leased facility for use in our Pain Management
business. We were reimbursed for the first $12 million in construction costs and
were responsible for all additional costs to complete and prepare the facility
for occupancy. We incurred related costs of $9 million in 2007 and $34 million
in 2006. Future lease payments over the remaining 13-year lease
106
term
included in the table above are approximately $39 million. In accordance with
EITF Issue No. 97-10, The
Effect of Lessee Involvement in Asset Construction, we have capitalized
approximately $14 million, representing the value of the underlying land, in our
consolidated balance sheets at December 31, 2007.
Future
minimum rental commitments at December 31, 2007 under noncancelable capital
lease agreements are as follows (in millions):
|
2008
|
$ |
5
|
||
|
2009
|
4
|
|||
|
2010
|
3
|
|||
|
2011
|
3
|
|||
|
2012
|
3
|
|||
|
Thereafter
|
47
|
|||
|
65
|
||||
|
Less:
portion representing interest
|
(31 | ) | ||
| $ |
34
|
The
majority of our capital lease obligations reported above relate to a new
manufacturing facility we are building in Costa Rica. We have an option to
purchase this property one year following the commencement of the lease term in
November 2007 for a purchase price of $30 million. This purchase option expires
in November 2011.
Note K—Income
Taxes
Our
(loss) income before income taxes consists of the following:
|
Year Ended December
31,
|
||||||||||||
|
(in
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Domestic
|
$ | (1,294 | ) | $ | (4,535 | ) | $ | (126 | ) | |||
|
Foreign
|
725
|
1,000
|
1,017
|
|||||||||
| $ | (569 | ) | $ | (3,535 | ) | $ |
891
|
|||||
The
related (benefit) provision for income taxes consists of the
following:
|
Year Ended December
31,
|
||||||||||||
|
(in
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Current
|
||||||||||||
|
Federal
|
$ |
99
|
$ |
375
|
$ |
147
|
||||||
|
State
|
46
|
53
|
37
|
|||||||||
|
Foreign
|
167
|
34
|
75
|
|||||||||
|
312
|
462
|
259
|
||||||||||
|
Deferred
|
||||||||||||
|
Federal
|
(345 | ) | (421 | ) | (25 | ) | ||||||
|
State
|
(20 | ) | (24 | ) | (1 | ) | ||||||
|
Foreign
|
(21 | ) |
25
|
30
|
||||||||
| (386 | ) | (420 | ) |
4
|
||||||||
| $ | (74 | ) | $ |
42
|
$ |
263
|
||||||
107
|
Year Ended December
31,
|
|||
|
2007
|
2006
|
2005
|
|
|
U.S.
federal statutory income tax rate
|
(35.0%)
|
(35.0%)
|
35.0%
|
|
Effect
of foreign taxes
|
(41.9%)
|
(6.1%)
|
(31.9%)
|
|
Research
and development credit
|
(2.4%)
|
(0.6%)
|
(1.6%)
|
|
Section
199 manufacturing deduction
|
(2.2%)
|
(0.5%)
|
|
|
Goodwill
write-down related to divestitures
|
33.2%
|
||
|
Valuation
allowance
|
19.6%
|
2.2%
|
(0.7%)
|
|
Non-deductible
acquisition expenses
|
5.4%
|
40.8%
|
9.9%
|
|
State
income taxes, net of federal benefit
|
4.0%
|
0.5%
|
3.0%
|
|
Other,
net
|
6.3%
|
0.4%
|
0.4%
|
|
Tax
liability release on unremitted earnings
|
(3.8%)
|
||
|
Sale
of intangible assets
|
3.3%
|
5.9%
|
|
|
Legal
settlement
|
10.2%
|
||
|
Extraordinary
dividend from subsidiaries
|
(0.7%)
|
||
|
(13.0%)
|
1.2%
|
29.5%
|
|
Significant
components of our deferred tax assets and liabilities are as
follows:
|
As of December
31,
|
||||||||
|
(in
millions)
|
2007
|
2006
|
||||||
|
Deferred
tax assets
|
||||||||
|
Inventory
costs, intercompany profit and related reserves
|
$ |
250
|
$ |
241
|
||||
|
Tax
benefit of net operating loss, capital loss and tax
credits
|
267
|
188
|
||||||
|
Reserves
and accruals
|
573
|
291
|
||||||
|
Restructuring
and acquisition-related charges, including purchased
research and development
|
112
|
108
|
||||||
|
Litigation
and product liability reserves
|
82
|
114
|
||||||
|
Unrealized
losses on derivative financial instruments
|
34
|
|||||||
|
Investment
writedown
|
107
|
78
|
||||||
|
Stock-based
compensation
|
84
|
57
|
||||||
|
Federal
benefit of uncertain tax positions
|
114
|
|||||||
|
Other
|
17
|
5
|
||||||
|
1,640
|
1,082
|
|||||||
|
Less:
valuation allowance on deferred tax assets
|
193
|
97
|
||||||
| $ |
1,447
|
$ |
985
|
|||||
|
Deferred
tax liabilities
|
||||||||
|
Property,
plant and equipment
|
$ |
51
|
$ |
76
|
||||
|
Intangible
assets
|
2,967
|
3,053
|
||||||
|
Litigation
settlement
|
24
|
24
|
||||||
|
Unrealized
gains on available-for-sale securities
|
10
|
10
|
||||||
|
Unrealized
gains on derivative financial instruments
|
19
|
|||||||
|
Other
|
4
|
|||||||
|
3,052
|
3,186
|
|||||||
| $ | (1,605 | ) | $ | (2,201 | ) | |||
At
December 31, 2007, we had U.S. tax net operating loss, capital loss and tax
credit carryforwards, the tax effect of which was $79 million. In addition, we
had foreign tax net operating loss carryforwards, the tax effect of which was
$188 million. These carryforwards will expire periodically beginning in
2008. We established a valuation allowance of $193 million against these
carryforwards, due to our determination, after consideration of all evidence,
both positive and negative, that it is more likely than not a portion of the
carryforwards will not be realized. The increase in the valuation allowance in
2007, as compared to 2006 is
108
attributable primarily to foreign net operating
losses generated during the year.
The
income tax impact of the other comprehensive income (loss) was a benefit of $53
million in 2007, a benefit of $27 million in 2006, and a provision of
$82 million in 2005.
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 $7.804
billion at December 31, 2007 and $7.186 billion at December 31,
2006.
As of
December 31, 2005, we had recorded a $133 million deferred tax liability for
unremitted earnings of certain foreign subsidiaries that we had anticipated
repatriating in the foreseeable future. During 2006, we made a significant
acquisition that, when combined with certain changes in business conditions
subsequent to the acquisition, resulted in a reevaluation of this liability. We
determined that we will not repatriate these earnings in the foreseeable future
and, instead, will indefinitely reinvest these earnings in foreign operations in
order to repay debt obligations associated with the acquisition. As a result, we
reversed the deferred tax liability and reduced income tax expense by $133
million in 2006.
During
the first quarter of 2005, we repatriated $1.046 billion in extraordinary
dividends, as defined in the American Jobs Creation Act, from our non-U.S.
operations. The American Jobs Creation Act, enacted in October 2004, created a
temporary incentive for U.S. corporations to repatriate accumulated income
earned abroad by providing an 85 percent dividends-received deduction for
certain dividends from controlled foreign operations. In 2005, we repatriated
earnings of non-U.S. subsidiaries for which we had previously accrued tax
liabilities. The resulting tax liabilities associated with this repatriation
were $127 million.
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes. As a result of the implementation of Interpretation No. 48, we
recognized a $126 million increase in our liability for unrecognized tax
benefits. Approximately $26 million of this increase was reflected as a
reduction to the January 1, 2007 balance of retained
earnings. Substantially all of the remaining increase related to
pre-acquisition uncertain tax liabilities related to Guidant, which we recorded
as an increase to goodwill in accordance with EITF Issue No. 93-7, Uncertainties Related to Income
Taxes in a Purchase Business Combination. At the adoption date
of January 1, 2007, we had $1.155 billion of gross unrecognized tax benefits,
$360 million of which, if recognized, would affect our effective tax rate in
accordance with currently effective accounting standards. 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 in accordance with
currently effective accounting standards. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows (in
millions):
|
Balance
at January 1, 2007
|
$ | 1,155 | |||
|
Additions
based on positions related to the current year
|
80 | ||||
|
Additions
for tax positions of prior years
|
60 | ||||
|
Reductions
for tax positions of prior years
|
(47 | ) | |||
|
Settlements
with taxing authorities
|
(61 | ) | |||
|
Statute
of limitation expirations
|
(7 | ) | |||
|
Balance
at December 31, 2007
|
$ | 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 1997. Substantially all material state, local, and
foreign income tax matters have been concluded for all years through
2001.
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
109
the 1995
to 1998 tax periods. As a result of
settlement of these matters, net of payments, we decreased our reserve for
uncertain tax positions by $67 million, inclusive of $16 million of interest and
penalties. Of this amount, we treated $53 million as a reduction
in goodwill in accordance with Issue No. 93-7, and we reversed the remaining $14
million to earnings. It is reasonably possible that within the next 12
months we will resolve multiple issues with taxing authorities, including
matters presently under consideration at IRS Appeals related to Guidant’s
acquisition of Intermedics and selected IRS examination issues for the 2001 to
2003 tax periods, in which case we could record a reduction in our balance
of unrecognized tax benefits of between $70 million and $141
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
$218 million accrued for interest and penalties at adoption of
Interpretation No. 48 and $264 million at December 31, 2007. The total amount of
interest and penalties recognized in our consolidated statements of operations
for 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 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 not known to management at the present time. We
are substantially self-insured with respect to general and 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 claims, product recalls, securities litigation, and other
litigation 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 $994 million
at December 31, 2007 and $485 million at December 31, 2006, and
includes estimated costs of settlement, damages and defense. The amounts accrued
relate primarily to Guidant litigation and claims recorded as part of the
Guidant purchase price, and to on-going patent litigation involving our
Interventional Cardiology business. We continue to
110
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, 2007 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 trial on both actions was held in late 2000. A jury found that
the NIR® stent does not infringe three Cordis patents, but does infringe one
claim of one Cordis patent and awarded damages of approximately
$324 million to Cordis. On March 28, 2002, the Court set aside the
damage award, but upheld the remainder of the verdict, and held that two of the
four patents had been obtained through inequitable conduct in the U.S. Patent
and Trademark Office. On May 27, 2005, Cordis filed an appeal on those two
patents and an appeal hearing was held on May 3, 2006. The United States
Court of Appeals for the Federal Circuit remanded the case back to the
trial court for further briefing and fact-finding by the Court. On
May 16, 2002, the Court also 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. The jury
determined liability only; any monetary damages will be determined at a later
trial. On March 27, 2006, the judge entered judgment in favor of Cordis, and on
April 26, 2006, we filed an appeal. A hearing on the appeal was held on October
3, 2007, and a decision was rendered on January 7, 2008 upholding the lower
court’s finding of infringement and reversing the finding of invalidity of a
second claim. The Court of Appeals remanded the case to the District
Court for further consideration. On February 4, 2008, we requested the Court of
Appeals rehear the appeal and reverse the lower court’s finding of infringement
and/or remand the case to the District Court for a new trial.
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 this action, the
Johnson & Johnson entities requested relief, including provisional
relief (a preliminary injunction). In October 1997, Johnson &
Johnson’s request for provisional cross-border relief on the patent was denied
by the Dutch Court, on the ground that it is “very likely” that the NIR® stent
will be found not to infringe the patent. Johnson & Johnson’s appeal of
this decision was denied. 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. On June 23, 1999, the Dutch Court affirmed that
there were no remaining infringement claims with respect to the patent. In late
1999, Johnson & Johnson appealed this decision. On March 11, 2004,
the Court of Appeals nullified the Dutch Court’s June 23, 1999 decision and
the proceedings have been returned to the Dutch Court. In accordance with its
1999 decision, 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 but
left certain legal issues for the Dutch Court to resolve. A hearing originally
scheduled for December 21, 2007 has been postponed and rescheduled for April 25,
2008.
On
August 22, 1997, Johnson & Johnson filed a suit for patent
infringement against us alleging that the sale of
111
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 December 2, 2004,
the Court dismissed the case, finding all patents to be invalid. On
December 6, 2004, Johnson & Johnson appealed the Court’s decision,
and in May 2006, the Court reinstated the patents. In August 2006, we appealed
the Court’s decision to the Supreme Court. On January 18, 2007, the Supreme
Court denied our request to review this matter. A trial began on January 21,
2008 and is expected to be concluded by the end of February 2008. A decision is
expected in three to six months.
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. A bench trial on interfering patent issues was held December 5,
2005 and on September 19, 2006, the Court found there to be no interference.
Trial began on October 9, 2007 and, on October 31, 2007, the 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. We filed a motion to overturn the jury verdict. A hearing on
post-trial motions was held on February 15, 2008, and on February 19, 2008, the
Court denied all post-trial motions. The Court also ordered the parties to
attempt to negotiate a reasonable royalty rate for future sales of the products
found to infringe or file further papers with the Court regarding continued
infringement We intend to appeal the decision.
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 and/or pushable
coil vascular occlusion systems (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. In 2004, the Court granted summary judgment in our favor
finding infringement of one of the patents. On November 14, 2005, the
Court denied Cordis’ summary judgment motions with respect to the validity of
the patent. Cordis filed a motion for reconsideration and a hearing was held on
October 26, 2006. The Court ruled on Cordis’ motion for reconsideration by
modifying its claim construction order. On February 7, 2007, Cordis filed a
motion for summary judgment of non-infringement with respect to this patent. On
July 27, 2007, the Court denied Cordis’ motion. The Court also modified its
claim construction and vacated its earlier summary judgment order finding
infringement by the Cordis device. Summary judgment motions with respect to
this patent were renewed by both parties and a hearing on these renewed motions
was held on January 18, 2008. Also on January 18, 2008, the Court granted
our motion for summary judgment that Cordis infringes a second patent in the
suit. On January 25, 2008, the Court ruled that two of the patents,
including the one on which summary judgment of infringement had just been
granted, are not invalid based on prior public or commercial use. Decisions on
the other motions for summary judgment have not yet been rendered.
On
January 13, 2003, Cordis filed suit for patent infringement against Boston
Scientific Scimed and us, alleging that our Express 2™ 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® Express 2™, Express 2 Express™ Biliary,
and Liberté stents infringe a Johnson & Johnson patent and that the
Liberté stent infringes a second Johnson & Johnson patent. The juries
only determined liability; monetary damages will be determined at a later trial.
We filed a motion to set aside the verdict and enter judgment in our favor as a
matter of law. On May 11, 2006, our motion was denied. 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
112
our
patent. Johnson & Johnson filed a motion to set aside the verdict and
enter judgment in its favor as a matter of law. On May 11, 2006, the Court
denied Johnson & Johnson’s motion. Johnson & Johnson filed a motion for
reconsideration, which was denied on March 27, 2007. On April 17, 2007, Johnson
& Johnson filed a second motion to set aside the verdict and enter judgment
in its favor as a matter of law or, in the alternative, request a new trial on
infringement. That motion was denied and judgment was entered on September 24,
2007. Both parties have filed an appeal, although a hearing date has not yet
been scheduled.
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. We subsequently filed amended and new complaints in the U.S.
District Court for the District of Delaware alleging that the Cypher
drug-eluting stent infringes an additional four of our patents (the Additional
Patents). In March 2005, we filed a stipulated dismissal as to three
of the four Additional Patents. On April 4, 2007, the Court granted summary
judgment of non-infringement of the remaining Additional Patent and the parties
entered a stipulated dismissal as to the claim of that patent on May 11, 2007.
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 will be
determined at a later trial. Johnson & Johnson filed a motion to set aside
the verdict and enter judgment in its favor as a matter of law. On June 15,
2006, the Court denied Johnson & Johnson’s motion. Johnson & Johnson
moved for reconsideration of the Court’s decision. A summary judgment hearing as
to the remaining patent asserted in our amended complaint was held on June 14,
2006. A hearing on the reconsideration motion was held on August 10, 2007. On
September 24, 2007, the Court denied Cordis’ motion for reconsideration. The
Court entered judgment against Cordis and on October 19, 2007, Cordis filed an
appeal. A hearing on the appeal has not yet been scheduled.
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. A hearing was held on September 20 and
21, 2007 and a decision was rendered on December 6, 2007, scheduling a new
hearing for May 29, 2008 to consider new evidence. 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. In
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 have filed a counterclaim infringement
action in Italy and an infringement action in Germany. A hearing is scheduled on
the German infringement action for July 15, 2008.
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 and
granted injunctive relief. On June 23, 2005, the District Court in Assen,
The Netherlands stayed enforcement of the injunction. On October 12, 2005,
a Dutch Court of Appeals overturned the Assen court’s ruling and reinstated the
injunction against the manufacture, use and sale of the Cordis products in The
Netherlands. Damages for Cordis’ infringing acts in The Netherlands will be
determined at a later date. Cordis appealed the validity and infringement ruling
by The Hague Court. A hearing on this appeal was held on November 2, 2006 and a
decision was received on March 15, 2007 finding the patent valid but not
infringed. We appealed the Court’s decision. A hearing on the appeal is expected
during the fourth quarter of 2008.
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 April 1, 2005
and on
113
July 15,
2005, the Court indicated that it would appoint a technical expert. The expert’s
opinion was submitted to the Court on September 19, 2006. A hearing was held on
September 21, 2007 in Mannheim, Germany, and a decision has not yet been
rendered.
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. A hearing was held on
April 1, 2005 and on July 15, 2005, the Court indicated that it would
appoint a technical expert. The expert’s opinion was submitted to the Court on
September 19, 2006. 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 SelectÔ drug-eluting stents
infringe one of our European patents. The suit was filed in Mannheim, Germany
seeking monetary and injunctive relief. A hearing date has not yet been
scheduled.
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. A hearing was held on
December 1, 2005. In January 2006, the judge rendered a decision of
non-infringement. On January 29, 2006, Boston Scientific Scimed appealed
the judge's decision. On February 15, 2007, the Court decided to appoint a
technical expert. A hearing date has not yet been scheduled.
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. Guidant
and we filed a motion to dismiss the complaint on November 15, 2006. Johnson
& Johnson filed its opposition to the motion on January 9, 2007, and
defendants filed their reply on January 31, 2007. A hearing on the motion to
dismiss was held on February 28, 2007. 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 October
10, 2007, the Court denied Johnson & Johnson’s motion to reconsider the
dismissal of the tortious interference claim against Abbott and us. A
trial date has not yet been scheduled.
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 May 24, 2006, Conor responded, denying the allegations and
filed a counterclaim against us alleging that the patent is not valid and is
unenforceable. On January 14, 2008, the case was dismissed pursuant to a
settlement agreement between the parties.
On May
25, 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 complaint, denying the allegations, and
filed a counterclaim for infringement seeking an injunction and a declaratory
judgment of validity. A trial is scheduled to begin on August 3,
2009.
On June
1, 2007, Boston Scientific Scimed and we filed a 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 complaint, denying the allegations, and
filed a counterclaim for infringement seeking an injunction and a declaratory
judgment of validity. A trial is scheduled to begin on August 3,
2009.
On June
22, 2007, Boston Scientific Scimed and we filed a 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
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owned by
them and of non-infringement of the patent by our PROMUS coronary stent
system. On February 21, 2008, Cordis answered the complaint, denying
the allegations, and filed a counterclaim for infringement seeking an injunction
and a declaratory judgment of validity. A trial is scheduled to
begin on August 3, 2009.
On
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 complaint, denying the allegations, and
filed a counterclaim for infringement seeking an injunction and a declaratory
judgment of validity. A trial is scheduled to begin on
August 3, 2009.
On
January 15, 2008, Johnson & Johnson Inc. filed a suit for patent
infringement against us alleging that the sale of the Express, Express 2 and
TAXUS EXPRESS 2 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. We intend to file a motion to dismiss the
complaint.
On
January 28, 2008, Wyeth and Cordis Corporation filed suit against Boston
Scientific Scimed and us, alleging 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. We have
not yet been served with the complaint.
On
February 1, 2008, Wyeth and Cordis Corporation filed an amended complaint
against Abbott Laboratories, adding us and Boston Scientific Scimed 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. We have
not yet answered the complaint, but intend to vigorously defend against its
allegations.
Litigation with
Medtronic, Inc.
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 April 25,
2006, we answered and filed a counterclaim seeking a declaratory judgment of
invalidity and non-infringement. Trial is scheduled to begin on May 5,
2008.
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. Trial is scheduled to begin on January 29,
2009.
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
February 8, 2008, we answered, denying the substantive allegations of the
complaint.
Litigation Relating to 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. In July 2001,
a jury found that a patent licensed to CPI and expired in December 2003, was
valid
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but not
infringed by certain of St. Jude Medical’s defibrillator products. In February
2002, the District Court reversed the jury’s finding of validity. In August
2004, the Federal Circuit Court of Appeals, among other things, reinstated the
jury verdict of validity and remanded the matter for a new trial on infringement
and damages. The case was sent back to the District Court for further
proceedings. Pursuant to a Settlement Agreement dated July 29, 2006 between St.
Jude Medical and us the parties agreed to limit the scope and available remedies
of this case. On March 26, 2007, the District Court issued a ruling invalidating
the patent. On April 23, 2007, we appealed the Court’s ruling. A hearing
on the appeal has not yet been scheduled.
Litigation with
Medinol Ltd.
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 the Company’s Liberté coronary stent system infringes two U.S.
patents and one European patent 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. As a result, we do not expect the outcome of this proceeding to have a
material impact on the continued sale of the Liberté® stent system
internationally or in the United States, the continued sale of the TAXUS®
Liberté® stent system internationally or the launch of the TAXUS® Liberté® stent
system in the United States. We plan to defend against Medinol’s claims
vigorously. The arbitration hearing was held on September 17 through September
21, 2007, and a decision is expected in March 2008.
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. We appealed the Court’s decision in
December 2003. A hearing on the appeal was held on August 17, 2006. On
December 14, 2006, a decision was rendered upholding the trial court ruling. We
appealed the Court’s decision on March 14, 2007. On May 25, 2007, Medinol moved
to dismiss our appeal, although a decision has not yet been
rendered.
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. As a result, we do not expect the outcome of this proceeding to have a
material impact on the continued sale of the PROMUS stent system internationally
or the launch of the PROMUS stent system in the United States. We plan to defend
against Medinol’s claims vigorously. A hearing is scheduled for May 11,
2009.
Other Patent
Litigation
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. The suit was filed in the U.S. District
Court for the District of Minnesota seeking monetary relief. On
September 26, 2001, we reached a contingent settlement with
Dr. Bonzel involving all but one claim asserted in the complaint. The
contingency was satisfied and the settlement is final. On
December 17, 2001, the remaining claim was dismissed without prejudice with
leave to refile the suit in Germany. Dr. Bonzel filed an appeal of the
dismissal of the remaining claim. On July 29, 2003, the
Appellate
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Court
affirmed the lower court’s dismissal, and on October 24, 2003, the
Minnesota Supreme Court denied Dr. Bonzel’s petition for further review. On
March 26, 2004, Dr. Bonzel filed a similar complaint against us,
certain of our subsidiaries and Pfizer in the Federal District Court for
the District of Minnesota. We answered, denying the allegations of the
complaint. We filed a motion to dismiss the case, and the case was
dismissed with prejudice on November 2, 2004. On February 7,
2005, Dr. Bonzel appealed the Court’s decision. On March 2, 2006, the
Federal District Court dismissed the appeal and affirmed the lower court’s
decision. 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 May 11, 2007, we
responded to Dr. Bonzel’s counsel’s letter asserting the validity of the 1995
license agreement. On October 5, 2007, Dr. Bonzel filed a complaint against us
in Kassel, Germany, which was formally served in December 2007, alleging the
1995 license agreement is invalid under German law and seeking monetary
damages. We have not yet answered the complaint, but intend to vigorously
defend against its allegations.
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 22,
2003, the Court ruled that the ev3 products infringe the three patents. On
December 18, 2003, ev3 appealed the Court’s ruling. A hearing on the appeal
has not yet been scheduled. A damages hearing originally scheduled for June 15,
2007 has been postponed and not yet rescheduled. On October 30, 2007, we reached
an agreement in principle with ev3 to resolve this matter. The parties are
currently negotiating a definitive settlement agreement.
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
January 8, 2004, Micro Therapeutics and Dendron filed a third-party
complaint to include Target Therapeutics and us as third-party defendants
seeking a declaratory judgment of invalidity and noninfringement with respect to
the patents and antitrust violations. On February 17, 2004, we, as a
third-party defendant, filed a motion to dismiss us from the case. On
July 9, 2004, the Court granted our motion in part and dismissed Target and
us from the claims relating only to patent infringement, while denying dismissal
of an antitrust claim. On April 7, 2006, the Court denied Micro Therapeutics’
motion seeking unenforceability of The Regents’ patent and denied The Regents’
cross-motion for summary judgment of enforceability. A summary judgment hearing
was held on July 31, 2007 relating to the antitrust claim, and on August 22,
2007, the Court granted summary judgment in our favor and dismissed us from the
case. On October 30, 2007, we reached an agreement in principle with ev3 to
resolve this matter. The parties are currently negotiating a definitive
settlement agreement.
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 May 9, 2005, ev3 answered the complaint, denying the
allegations, and filed a counterclaim seeking a declaratory judgment of
invalidity and unenforceability, and noninfringement of our patents in the suit.
On October 28, 2005, ev3 filed its first amended answer and counterclaim
alleging that certain of our embolic protection devices infringe a patent owned
by ev3. On June 20, 2006, we filed an amended complaint adding a claim of trade
secret misappropriation and claiming infringement of two additional U.S. patents
owned by us. On June 30, 2006, ev3 filed an amended answer and counterclaim
alleging infringement of two additional U.S. patents owned by ev3. A trial has
not yet been scheduled. On October 30, 2007, we reached an agreement in
principle with ev3 to resolve this matter. The parties are currently
negotiating a definitive settlement agreement.
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 the subsidiary.
The complaint was filed in the U.S. District Court for the Northern District of
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California
seeking monetary and injunctive relief. On November 16, 2004, Micrus
answered and filed counterclaims seeking a declaration of invalidity,
unenforceability and noninfringement and included allegations of infringement
against us relating to three U.S. patents owned by Micrus, and antitrust and
state law violations. On January 10, 2005, we filed a motion to dismiss
certain of Micrus' counterclaims, and on February 23, 2005, the Court
granted a request to stay the proceedings pending a reexamination of our patents
by the U.S. Patent and Trademark Office. On February 23, 2006, the stay was
lifted. Subsequently, Micrus provided a covenant not to sue us with respect to
one of the Micrus patents. On June 1, 2007, the Court held a claim construction
hearing regarding the various patents at issue, but the Court has not yet issued
a decision. A trial date has not yet been set.
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. A hearing was held January 13, 2006, and 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
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
claims were infringed and valid, and provided for injunctive and monetary
relief. On July 13, 2006, Sahajanand appealed the Court's decision. A hearing on
the appeal has been scheduled for March 13, 2008.
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. On June 24, 2005, we
answered, denying the allegations, and filed a counterclaim. 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. A
hearing has not yet been scheduled.
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 based on similar allegations as those pled in the original complaint
and alleging certain additional balloon catheters and stent delivery systems
infringe the same patent. On May 14, 2007, we answered, denying the allegations
of the first complaint. 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. A trial has
been scheduled for November 10, 2008.
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. A hearing on the merits in the infringement action
was held on February 12, 2008, and a decision is expected April 1,
2008.
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 8, 2006, we filed an answer, denying the allegations of the
complaint. Trial began on February 5, 2008. On February 11, 2008, the jury found
that our TAXUS® Express and TAXUS® Liberte® 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. We believe the jury verdict is unsupported by both the evidence and
the law. We will seek to overturn the
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verdict
in post-trial motions before the District Court and, if unsuccessful, to appeal
to the U.S. Court of Appeals for the Federal Circuit. On February 21, 2008, Dr.
Saffran filed a new complaint alleging willful infringement of the continued
sale of the TAXUS stent products. We will vigorously defend against its
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. On
February 18, 2008, Wall Cardiovascular Technologies filed a request to amend its
complaint to add Medtronic, Inc. to the suit with respect to its drug-eluting
stent system. We answered the original complaint denying the allegations and
intend to oppose the request to amend to add Medtronic.
Other
Proceedings
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
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. On
September 28, 2005, October 27, 2005, November 2, 2005 and
November 3, 2005, Jack Yopp, Robert L. Garber, Betty C. Meyer and John
Ryan, respectively, on behalf of themselves and all others similarly situated,
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 27, 2007, Mississippi Public Employee Retirement System Group
appealed the Court’s decision. A hearing on the appeal was held on February 8,
2008, although a decision has not yet been rendered.
On
January 19, 2006, George Larson, on behalf of himself and all others
similarly situated, filed a purported
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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 (together the Plans) 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. On January 26, 2006, February 8, 2006,
February 14, 2006, February 23, 2006 and March 3, 2006, Robert
Hochstadt, Jeff Klunke, Kirk Harvey, Michael Lowe and Douglas Fletcher,
respectively, on behalf of themselves and others similarly situated, filed
purported class action complaints in the same Court on behalf of the
participants and beneficiaries in our Plans alleging similar misconduct and
seeking similar relief as in the Larson lawsuit. On April 3, 2006, the Court
issued an order consolidating the actions and appointing Jeffrey Klunke and
Michael Lowe as interim lead plaintiffs. On August 23, 2006, plaintiffs filed a
consolidated complaint that purports to bring a class action 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 complaint alleges, among
other things, that the defendants breached their fiduciary duties to the 401(k)
Plan’s participants. The complaint seeks equitable and monetary relief.
Defendants filed a motion to dismiss on October 10, 2006, which was denied by
the Court on August 27, 2007. A trial has not yet been
scheduled.
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. At
the time of the EVT plea, Guidant had outstanding fourteen suits alleging
product liability related causes of action relating to the ANCURE System.
Subsequent to the EVT plea, Guidant was notified of additional claims and served
with additional complaints. From time to time, Guidant has settled certain of
the individual claims and suits for amounts that were not material to Guidant.
Currently, Guidant has approximately 16 suits outstanding, and more suits may be
filed. The complaints seek damages, including punitive damages. The complaints
are in various stages of discovery, with the earliest trial date set for the
summer of 2008. Additionally, Guidant has been notified of over 135 unfiled
claims that are pending. The cases generally allege the plaintiffs suffered
injuries, and in certain cases died, as a result of purported defects in the
device or the accompanying warnings and labeling.
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. A
trial has not yet been scheduled in either case. On March 23, 2007, the
Court in the Indiana lawsuit granted Guidant and its affiliates’ motion for
partial summary judgment regarding Allianz’s duty to defend, finding that
Allianz breached its duty to defend 41 ANCURE lawsuits. On April 19,
2007, Allianz filed a notice of appeal of that ruling. On July 11, 2007, the
Illinois court entered a final partial summary judgment ruling in favor of
Allianz. Guidant appealed the Court’s ruling on August 9, 2007. Both lawsuits
are currently partially stayed in the trial courts pending the outcome of the
respective appeals. Shareholder derivative suits relating to the ANCURE System
are currently 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 seek damages
and other equitable relief. The state court derivative suits have been stayed in
favor of the federal derivative action. 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. The plaintiff
in the federal derivative case filed an amended complaint in December 2005,
adding allegations regarding defibrillator and pacemaker products and Guidant’s
proposed merger with Johnson & Johnson. On March 17, 2006, the
plaintiff filed a second amended complaint in the federal derivative case. On
May 1, 2006, the defendants moved to dismiss the second amended complaint. This
motion remains pending.
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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 the Employee
Retirement Income Security Act (ERISA), 29 U.S.C. § 1132.
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. A second, similar complaint was filed and consolidated with the
initial complaint. A consolidated, amended complaint was filed on
February 8, 2006. The defendants moved to dismiss the consolidated
complaint, and on September 15, 2006, the Court dismissed the complaint for lack
of jurisdiction. In October 2006, the Plaintiffs appealed the Court’s decision
to the United States Court of Appeals for the Seventh Circuit. In June 2007, the
Court of Appeals vacated the dismissal and remanded the case to the District
Court. The Court of Appeals specifically instructed the District Court to
consider potential problems with the Plaintiffs’ ability to prove damages or a
breach of fiduciary duty. In September 2007, we filed a renewed
motion to dismiss the complaint for failure to state a claim. This
motion remains pending.
Approximately
75 product liability class action lawsuits and more than 2,300 individual
lawsuits involving approximately 5,500 individual plaintiffs are pending in
various state and federal jurisdictions against 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 250 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 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 are
aware of twelve lawsuits pending internationally. Five of those suits
are pending in Canada and are all putative class actions. A hearing
on whether the first of these putative class actions should be certified as a
class was held in mid-January 2008. A decision has not yet been
rendered.
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 (N.Y. Executive Law § 63(12)). 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 N.Y. Executive Law § 63(12). 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.
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. In September
2006, the EEOC found probable cause to support the allegations in the charges
pending before it.
121
Separately,
in April 2006, sixty-one of these former employees also sued Guidant in federal
district court for the District of Minnesota, again alleging that Guidant
discriminated against the former employees on the basis of their age when it
terminated their employment in the fall of 2004 as part of a reduction in force.
All but one of the plaintiffs in the federal court action signed a full and
complete release of claims that included any claim based on age discrimination,
shortly after their employments ended in 2004. The parties filed cross motions
for summary judgment on the issue of validity of the releases. A hearing was
held on February 21, 2007. On April 4, 2007, the Court issued a decision in
which it held that the releases did not bar the plaintiffs from pursuing their
claims of age discrimination against Guidant. On April 30, 2007, Guidant moved
the District Court for permission to appeal this decision to the United States
Court of Appeals for the Eighth Circuit but on July 18, 2007, the Court of
Appeals declined to accept our appeal. Counsel for the plaintiffs voluntarily
dismissed two of their clients from the case, leaving a total of fifty-nine
individual plaintiffs, and have moved the District Court for preliminary
certification of the matter as a class action. On September 28, 2007,
the Court granted plaintiffs’ motion for preliminary certification of their
proposed class. Following the preliminary certification, notice was
communicated to other potential class members of their right to join the class
and 47 former employees of Guidant have exercised that right. As a
result, the class currently consists of 106 individual plaintiffs. Discovery is
on-going and the deadline for any additional motions for summary judgment is May
1, 2009. The case is to be ready for trial on August 1,
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 four 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. Two of these actions were pending in the multi-district
litigation in the federal district court in Minnesota (MDL) as part of a single
`master complaint,’ filed on April 24, 2006, which also includes other types of
claims by other plaintiffs. The two named TPP plaintiffs in the master complaint
claim to represent a putative nationwide class of TPPs. These two TPP
plaintiffs had previously filed separate complaints against
Guidant. Guidant moved to dismiss the MDL TPP claims in the master
complaint for lack of standing and for failure to state a claim. A
hearing was held on March 6, 2007, and on April 16, 2007, the MDL Court granted
Guidant’s motion to dismiss, dismissing the claims of both TPP plaintiffs in the
MDL. The District Court subsequently amended its ruling to dismiss the
claims for lack of Article III standing without prejudice. The TPP plaintiffs
filed an appeal of that ruling in the United States Court of Appeals for the
Eighth Circuit. The Court of Appeals dismissed that appeal for lack of
jurisdiction. Plaintiffs subsequently filed a motion in the District Court for
certification of the dismissal. On November 16, 2007, the District Court denied
Plaintiffs’ motion.
The other
two 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. The complaints in these cases were served
on Guidant on May 18 and June 25, 2006, respectively. Guidant has moved to
dismiss both cases. 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
122
providers’
true costs for the devices. On April 25, 2006, the Court denied Guidant’s motion
to dismiss the complaint, but ordered the relator to file a second amended
complaint. On May 4, 2006, the relator filed a second amended complaint. On May
24, 2006, Guidant moved to dismiss that complaint, which motion was denied by
the Court on September 13, 2006. 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. To date, no state has intervened in this case. Discovery in this matter
is proceeding.
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.
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. That motion remains pending.
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 in these
matters.
On May 3,
2006, Emergency Care Research Institute (ECRI) filed a complaint against Guidant
in the U.S. District Court for the Eastern District of Pennsylvania generally
seeking a declaration that ECRI may publish confidential pricing information
about Guidant’s medical devices. The complaint seeks, on constitutional and
other grounds, a declaration that confidentiality clauses contained in contracts
between Guidant and its customers are not binding and that ECRI does not
tortiously interfere with Guidant’s contractual relations by obtaining and
publishing Guidant pricing information. Guidant’s motion to transfer the matter
to Minnesota was denied and discovery is proceeding in the Eastern District of
Pennsylvania. On November 14, 2007, the complaint was dismissed
pursuant to a settlement agreement between the parties.
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.
On February 20, 2007, the district court entered a preliminary injunction
prohibiting us from taking certain actions until we complete specific actions
described in the Merger Agreement. We appealed the preliminary injunction order
on March 16, 2007. On April 17, 2007, the District Court issued a permanent
injunction. On May 7, 2007, we appealed the permanent injunction
order. A hearing on the appeal was held on July 13, 2007. On August 24, 2007,
the U.S. Court of Appeals for the Second Circuit affirmed the order of the
District Court in part and vacated the order in part. In 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.
123
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. Guidant France filed a response to the
Statement of Objections on March 29, 2007. On June 25, 2007, a further report by
the case handler at the Competition Council was issued addressing the
defendants’ responses and recommending that the Council pursue the alleged
violation of competition law. Guidant France filed its full defense with the
Council in August 2007. A hearing before the Council was held on October 11,
2007. 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. Guidant
France did not appeal the decision of the Competition Council but other
defendants did. In reaction, the French Ministry of the Economy and Finance
filed an incidental recourse seeking aggravated sanctions against all
defendants. Guidant France expects to join the appellate
proceedings.
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 recent FDA
panel. We are one of two device companies asked to provide information
about research and marketing activities relating to drug-eluting
stents. We are cooperating with the Committee regarding its
request.
In
December 2007, we were informed by the Department of Justice that it is
conducting a civil investigation of allegations that we and other suppliers
improperly promoted biliary stents for off-label uses. Although we
have not received a subpoena for documents in this regard, we intend to
cooperate with the investigation.
FDA Warning
Letters
On
December 23, 2005, Guidant received an FDA warning letter citing certain
deficiencies with respect to its manufacturing quality systems and
record-keeping procedures in its CRM facility in St. Paul, Minnesota. In April
2007, following FDA reinspections of our CRM facilities, we resolved the warning
letter and all associated restrictions were removed.
On
January 26, 2006, legacy Boston Scientific received a corporate warning
letter from the FDA, notifying us of serious regulatory problems at three
facilities and advising us that our corrective action plan relating to
three site-specific warning letters issued to us in 2005 was inadequate. As
stated in this FDA warning letter, the FDA may not grant our requests for
exportation certificates to foreign governments or approve pre-market approval
applications for class III devices to which the quality control or
current good manufacturing practices deficiencies described in the letter are
reasonably related until the deficiencies have been corrected. In February
2008, the FDA commenced its reinspection of certain of our
facilities.
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 are taking corrective
action and have made certain commitments to the FDA regarding the conduct of our
clinical trials. We terminated the TriVascular AAA program in 2006 and do not
believe the recent warning letter will have an impact on the timing of the
resolution of our corporate warning letter.
Litigation-Related
Charges
In 2007,
we recorded a $365 million pre-tax charge associated with on-going patent
litigation involving our Interventional Cardiology business.
In 2005,
we recorded a $780 million pre-tax charge associated with a litigation
settlement with Medinol, Inc. On September 21, 2005, we reached a
settlement with Medinol resolving certain contract and patent infringement
litigation. In conjunction with the settlement agreement, we paid
$750 million in cash and cancelled our equity investment in
Medinol.
124
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, 2007 and 2006, 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 2007 or 2006. We
repurchased approximately 25 million shares of our common stock at an
aggregate cost of $734 million in 2005. 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
remaining in treasury at December 31, 2007 due to reissuance.
Note N—Stock Ownership
Plans
Employee and Director Stock
Incentive Plans
Our 2000
and 2003 Long-Term Incentive Plans (the Plans) provide for the issuance of up to
90 million shares of common stock. 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,
125
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.
We
adopted Statement No. 123(R) on January 1, 2006 using the modified-prospective
method, which is a method in which compensation cost is recognized beginning
with the effective date (i) based on the requirements of Statement No. 123(R)
for all share-based payments granted after the effective date and (ii) based on
the requirements of Statement No. 123 for all awards granted to employees prior
to the effective date of Statement No. 123(R) that were unvested on the
effective date. In accordance with this method of adoption, we have not restated
prior period results of operations and financial position to reflect the impact
of stock-based compensation expense. Prior to the adoption of Statement
No. 123(R), we accounted for options using the intrinsic value method under
the guidance of APB Opinion No. 25, and provided pro forma disclosure as allowed
by Statement No. 123.
The
following presents the impact of stock-based compensation on our consolidated
statements of operations for the years ended December 31, 2007 and 2006 for
options and restricted stock awards:
|
Year Ended December
31,
|
||||||||
|
(in
millions)
|
2007
|
2006
|
||||||
|
Cost
of products sold
|
$ |
19
|
$ |
15
|
||||
|
Selling,
general and administrative expenses
|
76
|
74
|
||||||
|
Research
and development expenses
|
27
|
24
|
||||||
|
122
|
113
|
|||||||
|
Income
tax benefit
|
35
|
32
|
||||||
| $ |
87
|
$ |
81
|
|||||
|
Net
income (loss) per common share - basic
|
$ |
0.06
|
$ |
0.06
|
||||
|
Net
income (loss) per common share - assuming dilution
|
$ |
0.06
|
$ |
0.06
|
||||
If we had
elected to recognize compensation expense in 2005 for the granting of options
under stock option plans based on the fair values at the grant date consistent
with the methodology prescribed by Statement No. 123, we would have reported net
income and net income per share as the following pro forma amounts:
126
|
Year
Ended
|
||||
|
December
31,
|
||||
|
(in millions, except per share
data)
|
2005
|
|||
|
Net
income, as reported
|
$ |
628
|
||
|
Add:
Stock-based compensation expense included in net income, net
of related tax effects
|
13
|
|||
|
Less:
Total stock-based compensation expense determined under fair value
based methods for all awards, net of related tax benefits
|
(74 | ) | ||
|
Pro forma net
income
|
$ |
567
|
||
|
Net income per common
share
|
||||
|
Basic
|
||||
|
Reported
|
$ |
0.76
|
||
|
Pro
forma
|
$ |
0.69
|
||
|
Assuming
dilution
|
||||
|
Reported
|
$ |
0.75
|
||
|
Pro
forma
|
$ |
0.68
|
||
Stock Options
Option
Valuation
We use
the Black-Scholes option-pricing model to calculate the grant-date fair value of
our stock options. In conjunction with the Guidant acquisition, we converted
certain outstanding Guidant options into approximately 40 million fully vested
Boston Scientific options. See
Note C - 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 2007, 2006 and 2005 using the following
estimated weighted-average assumptions:
|
Year Ended December
31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Options
granted (in thousands)
|
1,969
|
5,438
|
7,983
|
|||||||||
|
Weighted-average
exercise price
|
$ |
15.55
|
$ |
21.48
|
$ |
30.12
|
||||||
|
Weighted-average
grant-date fair value
|
$ |
6.83
|
$ |
7.61
|
$ |
12.18
|
||||||
|
Black-Scholes
Assumptions
|
||||||||||||
|
Expected
volatility
|
35 | % | 30 | % | 37 | % | ||||||
|
Expected
term (in years)
|
6.3
|
5.0
|
5.0
|
|||||||||
|
Risk-free
interest rate
|
4.05%-4.96 | % | 4.26%-5.18 | % | 3.37%-4.47 | % | ||||||
Expected
Volatility
We have
considered a number of factors in estimating 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 volatility. We now consider
historical volatility, trends in volatility within our industry/peer group, 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 currently the best
estimate of the expected term of our new option grants.
127
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.
Option
Activity
Information
related to stock options for 2005, 2006 and 2007 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,
2005
|
49,028
|
$ |
18
|
||||||||||
|
Granted
|
7,983
|
30
|
|||||||||||
|
Exercised
|
(5,105 | ) |
12
|
||||||||||
|
Cancelled/forefeited
|
(1,621 | ) |
28
|
||||||||||
|
Outstanding at December 31,
2005
|
50,285
|
$ |
20
|
||||||||||
|
Guidant
converted options
|
39,649
|
13
|
|||||||||||
|
Granted
|
5,438
|
21
|
|||||||||||
|
Exercised
|
(10,548 | ) |
11
|
||||||||||
|
Cancelled/forefeited
|
(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/forefeited
|
(2,470 | ) |
24
|
||||||||||
|
Outstanding at December 31,
2007
|
68,741
|
$ |
17
|
4
|
$ |
46
|
|||||||
|
Exercisable at December 31,
2007
|
59,045
|
$ |
16
|
3
|
$ |
46
|
|||||||
|
Expected to vest as of December
31, 2007
|
66,151
|
$ |
17
|
4
|
$ |
46
|
|||||||
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 2007 was $28 million as compared to $102
million in 2006.
Shares
reserved for future stock option issuance under our stock incentive plans
totaled approximately 83 million at December 31,
2007.
128
Non-Vested Stock
Award
Valuation
We value
restricted stock awards and DSUs based on the closing trading value of our
shares on the date of grant.
Award
Activity
Information
related to non-vested stock awards during 2006 and 2007, 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
|
(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
|
(778 | ) |
29
|
|||||
|
Forfeited
|
(1,621 | ) |
22
|
|||||
|
Balance at December 31,
2007
|
18,136
|
$ |
20
|
|||||
We
granted approximately 3.9 million non-vested stock award units in 2005; there
was no other significant non-vested stock award activity in 2005. The total
vesting date fair value of stock award units that vested during 2007 was
approximately $15 million, as compared to $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 will
recognize the expense in our consolidated statement of operations using an
accelerated attribution method through 2009.
Expense
Attribution
We
generally recognize compensation expense for our stock awards issued subsequent
to the adoption of
129
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 will 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
will 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.
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, 2007, 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.
Most of
our stock awards provide for immediate vesting upon retirement, death or
disability of the participant. Prior to the adoption of Statement No. 123(R), we
accounted for the pro forma compensation expense related to stock-based awards
made to retirement eligible individuals using the stated vesting period of the
award. This approach results in the recognition of compensation expense over the
vesting period except in the instance of the participant’s actual retirement.
Statement No. 123(R) clarified the accounting for stock-based awards made
to retirement eligible individuals, which explicitly provides that the vesting
period for a grant made to a retirement eligible employee is considered
non-substantive and should be ignored when determining the period over which the
award should be expensed. Upon adoption of Statement No. 123(R), we are
required to 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. If we had historically accounted for stock-based awards made
to retirement eligible individuals under these requirements, the pro forma
expense disclosed in the table above for 2005 would not have been materially
impacted.
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, 2007:
|
Unrecognized
Compensation
Cost
(in
millions)*
|
Weighted-Average
Remaining
Vesting
Period
(in
years)
|
|||||||
|
Stock
options
|
$ |
32
|
||||||
|
Non-vested
stock awards
|
171
|
|||||||
| $ |
203
|
3.3
|
||||||
*Amounts
presented represent compensation cost, net of estimated
forfeitures.
Tax Impact of Stock-Based
Compensation
Prior to
the adoption of Statement No. 123(R), we reported the benefit of tax
deductions in excess of recognized share-based compensation expense on our
consolidated statements of cash flows as operating
130
cash
flows. Under Statement No. 123(R), such excess tax benefits must be reported as
financing cash flows. Although total cash flows under Statement No. 123(R)
remain unchanged from what we would have reported under prior accounting
standards, our net operating cash flows are reduced and our net financing cash
flows are increased due to the adoption of Statement No. 123(R). There
were excess tax benefits of $2 million for 2007 and $7 million for 2006, which
we have classified as financing cash flows. There were excess tax benefits of
$28 million for 2005, which we have classified as operating cash
flows.
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. The terms and conditions
of the 2006 employee stock purchase plan are substantially similar to the
previous employee stock purchase plan, which expired in 2007. 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, 2007, there were approximately 16 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
for the given year is as follows:
|
2007
|
2006
|
2005
|
|
|
Shares issued (in
thousands)
|
3,418
|
2,765
|
1,445
|
|
Range
of purchase prices
|
$10.47
- $13.04
|
$14.20
- $14.31
|
$20.82
- $22.95
|
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 $13 million in expense associated with
our employee stock purchase plan in 2007 and $12 million in 2006.
In
connection with our acquisition of Guidant, we assumed Guidant’s employee stock
ownership plan (ESOP), which matches employee 401(k) contributions in the form
of stock. Common stock held by the ESOP are allocated among participants’
accounts on a periodic basis until these shares are exhausted. At
December 31, 2007, the ESOP held approximately 8.0 million shares allocated
to employee accounts and approximately 1.0 million unallocated shares. We
report the cost of shares held by the ESOP and not yet allocated to employees as
a reduction of stockholders’ equity. Allocated shares of the ESOP are charged to
expense based on the fair value of the common stock on the date of transfer.
Allocated shares are treated as outstanding in the computation of earnings per
share. 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. We recognized compensation expense of $23 million in 2007
and $19 million in 2006 related to the plan. The fair value of the unallocated
shares at December 31, 2007 was $11 million.
Note O—Weighted-Average Shares
Outstanding
The
following is a reconciliation of weighted-average shares outstanding for basic
and diluted income (loss) per share computations:
131
|
Year Ended December
31,
|
||||||||||||
|
(in
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Weighted-average
shares outstanding - basic
|
1,486.9
|
1,273.7
|
825.8
|
|||||||||
|
Net
effect of common stock equivalents
|
11.8
|
|||||||||||
|
Weighted-average
shares outstanding - assuming dilution
|
1,486.9
|
1,273.7
|
837.6
|
|||||||||
Weighted-average
shares outstanding, assuming dilution, excludes the impact of 42.5 million stock
options for 2007, 30.3 million for 2006, and 12.2 million for 2005, 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 the
impact of common stock equivalents of 13.1 million for 2007 and 15.6 million for
2006 due to our net loss position for those years.
Note P—Segment
Reporting
As of
December 31, 2007, we had four reportable operating segments based on geographic
regions: the United States, Europe, Asia Pacific and Inter-Continental. During
2007, we reorganized our international business, and therefore, revised our
reportable segments to reflect the way we currently manage and view our
business. We combined certain countries that were previously part of our
Inter-Continental region with Japan to form a new Asia Pacific region. There
were no material changes to the composition of our Europe or United States
segments. Each of our reportable segments generates revenues from the sale of
medical devices. 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 and segment assets
certain corporate and manufacturing-related expenses and assets, 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 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, restructuring activities, certain litigation, 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 and operating results of reportable segments are based
on internally derived standard foreign exchange rates, which may differ from
year to year and do not include intersegment profits. We have restated the
segment information for 2006 and 2005 net sales and operating results based on
our standard foreign exchange rates used for 2007 in order to remove the impact
of currency fluctuations. In addition, we have reclassified previously reported
2006 and 2005 segment results to be consistent with the 2007 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. We base total assets and
enterprise-wide information on actual foreign exchange rates used in our
consolidated financial statements. A reconciliation of the totals reported for
the reportable segments to the applicable line items in our consolidated
financial statements is as follows:
132
|
Year Ended December
31,
|
||||||||||||
|
(in
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Net
sales
|
||||||||||||
|
United
States
|
$ |
4,923
|
$ |
4,840
|
$ |
3,852
|
||||||
|
Europe
|
1,621
|
1,534
|
1,187
|
|||||||||
|
Asia
Pacific
|
1,178
|
964
|
857
|
|||||||||
|
Inter-Continental
|
417
|
445
|
363
|
|||||||||
|
Net
sales allocated to reportable segments
|
8,139
|
7,783
|
6,259
|
|||||||||
|
Foreign
exchange
|
218
|
38
|
24
|
|||||||||
| $ |
8,357
|
$ |
7,821
|
$ |
6,283
|
|||||||
|
Depreciation
expense
|
||||||||||||
|
United
States
|
$ |
42
|
$ |
35
|
$ |
21
|
||||||
|
Europe
|
12
|
9
|
4
|
|||||||||
|
Asia
Pacific
|
14
|
11
|
4
|
|||||||||
|
Inter-Continental
|
6
|
5
|
2
|
|||||||||
|
Depreciation
expense allocated to reportable segments
|
74
|
60
|
31
|
|||||||||
|
Manufacturing
operations
|
120
|
103
|
87
|
|||||||||
|
Corporate
expenses and foreign exchange
|
104
|
88
|
44
|
|||||||||
| $ |
298
|
$ |
251
|
$ |
162
|
|||||||
|
(Loss) income before
income taxes
|
||||||||||||
|
United
States
|
$ |
1,362
|
$ |
1,705
|
$ |
1,738
|
||||||
|
Europe
|
798
|
776
|
664
|
|||||||||
|
Asia
Pacific
|
679
|
507
|
449
|
|||||||||
|
Inter-Continental
|
186
|
208
|
165
|
|||||||||
|
Operating
income allocated to reportable segments
|
3,025
|
3,196
|
3,016
|
|||||||||
|
Manufacturing
operations
|
(646 | ) | (577 | ) | (408 | ) | ||||||
|
Corporate
expenses and foreign exchange
|
(529 | ) | (510 | ) | (386 | ) | ||||||
|
Acquisition-
, divestiture-, litigation- and restructuring-related
charges
|
(1,223 | ) | (4,528 | ) | (1,102 | ) | ||||||
|
Amortization
expense
|
(641 | ) | (530 | ) | (152 | ) | ||||||
|
Operating
(loss) income
|
(14 | ) | (2,949 | ) |
968
|
|||||||
|
Other
expense
|
(555 | ) | (586 | ) | (77 | ) | ||||||
| $ | (569 | ) | $ | (3,535 | ) | $ |
891
|
|||||
|
As of December
31,
|
||||||||||||
|
2007
|
2006
|
|||||||||||
|
Total
assets
|
||||||||||||
|
United
States
|
$ |
2,168
|
$ |
2,262
|
||||||||
|
Europe
|
1,523
|
1,150
|
||||||||||
|
Asia
Pacific
|
479
|
340
|
||||||||||
|
Inter-Continental
|
282
|
170
|
||||||||||
|
Total
assets allocated to reportable segments
|
4,452
|
3,922
|
||||||||||
|
Goodwill
and intangible assets
|
23,067
|
22,378
|
||||||||||
|
All
other corporate and manufacturing operations assets
|
3,678
|
4,582
|
||||||||||
| $ |
31,197
|
$ |
30,882
|
|||||||||
133
Enterprise-Wide
Information
|
Net
sales
|
||||||||||||
|
Year Ended December,
31
|
||||||||||||
|
(in
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Interventional
Cardiology
|
$ |
3,117
|
$ |
3,612
|
$ |
3,783
|
||||||
|
Cardiac
Rhythm Management
|
2,124
|
1,371
|
N/A
|
|||||||||
|
Other
|
1,320
|
1,258
|
1,124
|
|||||||||
|
Cardiovascular
|
6,561
|
6,241
|
4,907
|
|||||||||
|
Endosurgery
|
1,479
|
1,346
|
1,228
|
|||||||||
|
Neuromodulation
|
317
|
234
|
148
|
|||||||||
| $ |
8,357
|
$ |
7,821
|
$ |
6,283
|
|||||||
|
United
States
|
$ |
4,923
|
$ |
4,840
|
$ |
3,852
|
||||||
|
Japan
|
803
|
594
|
579
|
|||||||||
|
Other
foreign countries
|
2,631
|
2,387
|
1,852
|
|||||||||
| $ |
8,357
|
$ |
7,821
|
$ |
6,283
|
|||||||
|
Long-lived
assets
|
||||||||||||
|
As of December
31,
|
||||||||||||
|
(in
millions)
|
2007
|
2006
|
||||||||||
|
United
States
|
$ |
1,362
|
$ |
1,279
|
||||||||
|
Ireland
|
235
|
190
|
||||||||||
|
Other
foreign countries
|
138
|
175
|
||||||||||
|
Property,
plant and equipment, net
|
1,735
|
1,644
|
||||||||||
|
Goodwill
and intangible assets
|
23,067
|
22,378
|
||||||||||
| $ |
24,802
|
$ |
24,022
|
|||||||||
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 for
more information regarding our application of Interpretation No. 48 and its
impact on our consolidated financial statements for the year ended December 31,
2007.
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
134
accounting
rules, in other comprehensive income (loss). We adopted
Statement No. 158 in 2006.
Issue No. 06-3
In June
2006, the FASB ratified EITF Issue No. 06−3, How Taxes Collected from Customers
and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation). The scope of this
consensus includes any taxes assessed by a governmental authority that are
directly imposed on a revenue producing transaction between a seller and a
customer and may include, but are not limited to: sales, use, value-added, and
some excise taxes. Per the consensus, the presentation of these taxes on either
a gross (included in revenues and costs) or a net (excluded from revenues) basis
is an accounting policy decision that should be disclosed. We present sales net
of sales taxes in our unaudited condensed consolidated statements of operations.
We adopted Issue No. 06−3 as of the first quarter of 2007. No change of
presentation has resulted from our adoption of Issue No.
06−3.
Statement No.
123(R)
In
December 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 Accounting Principles Board
Opinion No. 25, Accounting for
Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. We
adopted Statement No. 123(R) as of January 1, 2006. Refer to Note N – Stock Ownership Plans
for discussion of our adoption of the standard and its impact on our
financial statements.
New Standards to be
Implemented
Statement No.
141(R)
In
December 2007, the FASB issued Statement No. 141 (R), Business Combinations, a
replacement for Statement No. 141, Business Combinations. The
Statement 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
have 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.
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 are required to apply the provisions of
Statement No. 157 prospectively as of January 1, 2008, and recognize any
transition adjustment as a cumulative-effect adjustment to the opening balance
of retained earnings. We are in the process of determining the effect of
adoption of Statement No. 157, but we do not believe its adoption will
materially impact our future results of operations or financial
position.
Statement No.
159
In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement
No. 115, which allows an entity to elect to record financial
135
assets
and liabilities at fair value upon their initial recognition on a
contract-by-contract basis. Subsequent changes in fair value would be recognized
in earnings as the changes occur. Statement No. 159 also establishes additional
disclosure requirements for these items stated at fair value. Statement No. 159
is effective for our 2008 fiscal year, with early adoption permitted, provided
that we also adopt Statement No. 157, Fair Value
Measurements. We are currently evaluating the impact that the
adoption of Statement No. 159 will have on our consolidated financial
statements.
136
QUARTERLY RESULTS OF
OPERATIONS
(in
millions, except per share data)
(unaudited)
|
Three Months
Ended
|
||||||||||||||||
|
March
31,
|
June 30,
|
Sept 30,
|
Dec 31,
|
|||||||||||||
|
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 | ) | ||||||
|
2006
|
||||||||||||||||
|
Net
sales
|
$ |
1,620
|
$ |
2,110
|
$ |
2,026
|
$ |
2,065
|
||||||||
|
Gross
profit
|
1,246
|
1,433
|
1,396
|
1,539
|
||||||||||||
|
Operating
income (loss)
|
497
|
(3,925 | ) |
195
|
284
|
|||||||||||
|
Net
income (loss)
|
332
|
(4,262 | ) |
76
|
277
|
|||||||||||
|
Net
income (loss) per common share - basic
|
$ |
0.40
|
$ | (3.21 | ) | $ |
0.05
|
$ |
0.19
|
|||||||
|
Net
income (loss) per common share - assuming dilution
|
$ |
0.40
|
$ | (3.21 | ) | $ |
0.05
|
$ |
0.19
|
|||||||
During
2007, we recorded acquisition-, divestiture-, litigation- and
restructuring-related charges (after tax) of $20 million in the first quarter,
$1 million in the second quarter, $435 million in the third quarter
and $636 million in the fourth quarter. These charges consisted of: a charge
attributable to estimated losses associated with litigation; restructuring
charges attributable to our expense and head count reduction initiative; losses
associated with the write-down of goodwill attributable to the sale of certain
of our businesses; a charge for in-process research and development costs
related to business acquisitions and strategic alliances; and Guidant
integration costs.
During
2006, we recorded no acquisition-related charges (after tax) in the first
quarter, $4.489 billion in the second quarter, $77 million in the
third quarter and $23 million in the fourth quarter. These charges consisted of:
a charge for purchased in-process research and development costs related to the
Guidant acquisition; a charge resulting from a purchase accounting associated
with the step-up value of acquired Guidant inventory sold; and other charges
related primarily to the Guidant acquisition, including the fair value
adjustment related to the sharing of proceeds feature of the Abbott stock
purchase.
137
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND 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, 2007 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, 2007,
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, 2007, 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.
138
PART III
Our
directors and executive officers as of December 31, 2007, were as
follows:
|
DIRECTORS
|
||
|
John
E. Abele
|
70
|
Director,
Founder
|
|
Ursula
M. Burns
|
49
|
Director,
President, Xerox Corporation
|
|
Nancy-Ann
DeParle
|
51
|
Director,
Managing Director, CCMP Capital Advisors, LLC
|
|
J.
Raymond Elliott
|
58
|
Director,
Retired Chairman, President and Chief Executive Officer of Zimmer
Holdings, Inc.
|
|
Joel
L. Fleishman
|
73
|
Director,
Professor of Law and Public Policy, Duke University
|
|
Marye
Anne Fox, Ph.D.
|
60
|
Director,
Chancellor of the University of California, San Diego
|
|
Ray
J. Groves
|
72
|
Director,
Retired Chairman and Chief Executive Officer, Ernst &
Young
|
|
Kristina
M. Johnson
|
50
|
Director,
Provost and Senior Vice President of Academic Affairs, The Johns Hopkins
University
|
|
Ernest
Mario, Ph.D.
|
69
|
Director,
Chairman and Chief Executive Officer, Capnia, Inc.
|
|
N.J.
Nicholas, Jr.
|
68
|
Director,
Private Investor
|
|
Pete
M. Nicholas
|
66
|
Director,
Founder, Chairman of the Board
|
|
John
E. Pepper
|
69
|
Director,
Co-Chair, National Underground Railroad Freedom Center
|
|
Uwe
E. Reinhardt, Ph.D.
|
70
|
Director,
Professor of Political Economy and Economics and Public Affairs, Princeton
University
|
|
Senator
Warren B. Rudman
|
77
|
Director,
Former U.S. Senator, Co-Chairman, Stonebridge International, LLC and Of
Counsel, Paul, Weiss, Rifkind, Wharton, & Garrison
LLP
|
|
James
R. Tobin
|
63
|
President
and Chief Executive Officer and Director
|
|
EXECUTIVE
OFFICERS
|
||
|
Donald
Baim, M.D.
|
58
|
Executive
Vice President, Chief Medical and Scientific Officer
|
|
Brian
R. Burns
|
43
|
Senior
Vice President, Quality
|
|
Fredericus
A. Colen
|
55
|
Executive
Vice President, Operations and Technology, CRM
|
|
Paul
Donovan
|
52
|
Senior
Vice President, Corporate Communications
|
|
Jim
Gilbert
|
50
|
Executive
Vice President, Strategy and Business Development
|
|
William
H. (Hank) Kucheman
|
58
|
Senior
Vice President and Group President of Interventional
Cardiology
|
|
Paul
A. LaViolette
|
50
|
Chief
Operating Officer
|
|
Sam
R. Leno
|
62
|
Executive
Vice President, Finance and Information Systems and Chief Financial
Officer
|
|
William
McConnell
|
58
|
Senior
Vice President, Sales, Marketing and Administration,
CRM
|
|
David
McFaul
|
51
|
Senior
Vice President, International
|
|
Stephen
F. Moreci
|
56
|
Senior
Vice President and Group President, Endosurgery
|
|
Kenneth
J. Pucel
|
41
|
Executive
Vice President, Operations
|
|
Lucia
L. Quinn
|
54
|
Executive
Vice President, Human Resources
|
|
Paul
W. Sandman
|
60
|
Executive
Vice President, Secretary and General
Counsel
|
139
John E.
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 FIRST
(For Inspiration and Recognition of Science and Technology) Foundation and is
also a member of numerous not-for-profit boards. Mr. Abele received a B.A.
degree from Amherst College.
Donald S.
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,
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 was recruited to establish an
Interventional Cardiology program at 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 a M.D. from Yale University School of
Medicine.
Brian R.
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.
Fredericus
A. Colen is our Executive Vice President, Operations and Technology, 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
140
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. 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. He was the Vice President of the
International Association of Prosthesis Manufacturers (IAPM) in Brussels from
1995 to 1997.
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 an Adjunct
Professor at The Wharton School of the University of Pennsylvania. She had
been a Senior Advisor for JPMorgan Partners. 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. Prior
to her role at HCFA, she 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 has also worked as a lawyer in private practice in Nashville, Tennessee and
Washington, D.C. Ms. DeParle is a director of Cerner Corporation, DaVita
Inc. and Legacy Hospital Partners, Inc. She is also a trustee of the
Robert Wood Johnson Foundation, and serves on the Medicare Payment Advisory
Commission and serves on the editorial board of Health Affairs.
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.
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 Greater Boston Chamber of Commerce and
the Massachusetts High Technology Council, and Secretary of the Massachusetts
Medical Device Industry Council. Mr. Donovan received a B.A. degree from
Dartmouth College.
J.
Raymond Elliott became a Director of Boston Scientific in August
2007. Mr. Elliott was the Chairman of Zimmer Holdings, Inc. until
November 2007 and was 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 is a director of the
Indiana Chamber of Commerce, the American Swiss Foundation and the 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 L.
Fleishman has been a Director of Boston Scientific since October 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
141
Visiting
Committee of the Kennedy School of Government, Harvard University, and as 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 October 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 and serves 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 organizations, and is a
member of the boards of directors of Red Hat Corp., the Camille and Henry
Dreyfus Foundation, and the W.R. Grace Co. 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.
James
Gilbert joined Boston Scientific in 2004 and became our Executive Vice
President, Strategy and Business Development in 2008. Prior to that, he was our
Executive Vice President and Group President, Cardiovascular and
oversaw our Cardiovascular Group, which includes our Peripheral Interventions,
Vascular Surgery, Neurovascular, Electrophysiology and Cardiac Surgery
businesses. Mr. Gilbert also oversees our Marketing Science, E-Marketing, and
Health Economics and Reimbursement functions. Previously, he was a Senior Vice
President and prior to that worked on a contractor basis as our Assistant to the
President from January 2004 to December 2004. Prior to joining Boston
Scientific, 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.
Ray J.
Groves has been a Director of Boston Scientific since 1999. From 2001 to 2005,
he 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 Electronic Data Systems
Corporation, the Colorado Physicians Insurance Company, Group Ark
Insurance Holdings, Ltd. and Chairman of Calvert Street Capital Corporation.
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 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
M. Johnson has been a Director of Boston Scientific since April 2006. Dr.
Johnson is Provost and Senior Vice President of Academic Affairs at The Johns
Hopkins University. Until July 2007, she was the Dean of the Pratt School of
Engineering at Duke University, a position she had held since 1999. Previously,
she served as a professor in the Electrical and Computer Engineering Department,
University of Colorado and 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 also serves on the board of
142
directors
of SPIE (The International Society for Optical Engineering) and Spark IP, a
privately held Corporation. 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.
William
H. Kucheman joined Boston Scientific in 1995 as a result of the merger between
Boston Scientific and SCIMED Life Systems, Inc. and is our Senior Vice President
and Group President of the Interventional Cardiology Group. Previously, Mr.
Kucheman served as our Senior Vice President of Marketing. Prior to joining
Boston Scientific, he held a variety of management positions in sales and
marketing for SCIMED Life Systems, Inc., 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 and State University.
Paul A.
LaViolette joined Boston Scientific in January 1994 and is our Chief
Operating Officer. Previously, Mr. LaViolette was President, Boston
Scientific International, and Vice President-International from
January 1994 to February 1995. In February 1995,
Mr. LaViolette was elected to the position of Senior Vice President and
Group President-Nonvascular Businesses. In October 1998,
Mr. LaViolette was appointed President, Boston Scientific International,
and in February 2000 assumed responsibility for the Boston Scientific’s
Scimed, EPT and Target businesses as Senior Vice President and Group President,
Cardiovascular. In March 2001, he also assumed the position of President,
Scimed. Prior to joining Boston Scientific, he was employed by C.R.
Bard, Inc. in various capacities, including President, U.S.C.I. Division,
from July 1993 to November 1993, President, U.S.C.I. Angioplasty
Division, from January 1993 to July 1993, Vice President and General
Manager, U.S.C.I. Angioplasty Division, from August 1991 to
January 1993, and Vice President U.S.C.I. Division, from January 1990
to August 1991. Mr. LaViolette received his B.A. degree from Fairfield
University and an M.B.A. degree from Boston College.
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, chairs the finance committee and is a
member of the audit committee. Mr. Leno received a B.S. degree in
Accounting for Northern Illinois University and an M.B.A. from Roosevelt
University.
Ernest
Mario has been a Director of Boston Scientific since October 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.,
143
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.
William
F. McConnell, Jr. joined Boston Scientific in April 2006 following our
acquisition of Guidant and is our Senior Vice President, Sales, Marketing and
Administration, CRM. Prior to joining Boston Scientific, Mr. McConnell was Vice
President and Chief Information Officer for Guidant Corporation, which he joined
in 1998. Previously, he was Managing Partner — Business Consulting in the
Indianapolis office of Arthur Andersen LLP. Mr. McConnell serves as a board
member of the Global Healthcare Exchange, Vesalius Ventures, and Board of
Governors of the National American Red Cross. He is the Chairman of the Board of
Trustees for the Trustee Leadership Development and Honorary Trustee of the
Children’s Museum of Indianapolis. He is also a board member of the Information
Technology Committee of Community Hospitals of Indianapolis, Inc., the Indiana
University Information Technology Advancement Council, and ex officio 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 and is a
Certified Public Accountant.
David
McFaul is Senior Vice President-International at Boston Scientific Corporation
and a member of the Company’s Executive Committee. 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 our Canadian
business and was President of our Japan operations. Prior to this, Mr. McFaul
was Vice President of Sales, Inter-Continental. Previously, he was Vice
President and General Manager of our operations in Latin America, Canada and
South Africa where he increased revenue nearly 50 percent. Prior to this, he was
General Manager, Canada and South Africa, Country Manager of Canada and National
Sales Manager, Canada. 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. David earned a B.A. in History and Geography from
Simon Fraser University and took graduate courses at Simon Fraser University
Graduate School.
Stephen
F. 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.
N.J.
Nicholas, Jr. has been a Director of Boston Scientific since October 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 director of Turner Broadcasting and 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 also the
brother of Pete M. Nicholas, Chairman of the Board.
Peter M.
Nicholas, a co-founder of Boston Scientific, 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
144
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 National 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 also the brother of N.J. Nicholas, Jr., one of our
directors.
John E.
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 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.
Mr. Pepper is chairman of the board of directors of The Walt Disney
Company, and 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).
Kenneth
J. Pucel is our Executive Vice President of Operations. Previously, he was our
Senior Vice President, Operations and 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 our
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 L.
Quinn joined Boston Scientific in January 2005 and is our Executive
Vice-President—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, Worldwide Brand Strategy &
Management. She served as Chair of the Simmons College Board of Trustees from
2004 to 2007 and has been a trustee of Simmons College since 1996. She currently
chairs the Executive Compensation Committee and sits on the Executive Committee
there. Ms. Quinn received her B.A. in Management from Simmons
College.
Uwe E.
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 Duke University and 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 board of directors of Amerigroup Corporation and
Legacy Hospital Partners, Inc. Dr. Reinhardt is also a member of the
Institute of Medicine of the National Academy of Sciences. Dr. Reinhardt
received a Bachelor of Commerce degree from the University of Saskatchewan,
Canada and a Ph.D. in economics from Yale University.
145
Senator
Warren B. Rudman has been a Director of Boston Scientific since
October 1999. Senator Rudman is Co-Chairman of Stonebridge International,
LLC and has been Of Counsel to the international law firm Paul, Weiss, Rifkind,
Wharton, and 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.
Paul W.
Sandman joined Boston Scientific in May 1993 and since December 2004,
has been our Executive Vice President, Secretary and General Counsel.
Previously, Mr. Sandman served as our Senior Vice President, Secretary and
General Counsel. From March 1992 through April 1993, he was Senior
Vice President, General Counsel and Secretary of Wang Laboratories, Inc.,
where he was responsible for legal affairs. From 1984 to 1992, Mr. Sandman
was Vice President and Corporate Counsel of Wang Laboratories, Inc., where
he was responsible for corporate and international legal affairs.
Mr. Sandman received his A.B. from Boston College and his J.D. from Harvard
Law School. Mr. Sandman will be retiring from Boston Scientific on February 29,
2008.
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.
The
information required by this Item and set forth in our Proxy Statement to be
filed with the SEC on or about March 19, 2008, 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 19, 2008, 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 19, 2008, 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 19, 2008, is incorporated into this Annual
Report on Form 10-K by reference.
146
PART IV
(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
|
|
||
|
2.1
|
Agreement
and Plan of Merger, dated as of January 25, 2006, among Boston Scientific
Corporation, Galaxy Merger Sub, Inc. and Guidant Corporation (Exhibit 2.1,
Current Report on Form 8-K, dated January 25,2006, File No.
1-11083).
|
|
||
|
|
|
|||
|
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.
|
|
||
|
|
|
|||
|
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).
|
|
||
|
|
|
|||
|
4.9
|
Form
of Global Security for the 5.125% Notes due 2017 (Exhibit 4.3, Current
Report on Form 8-K dated November 18, 2004, File No.
1-11083).
|
|
||
|
|
|
|||
147
|
4.10
|
Form
of Global Security for the 4.250% Notes due 2011 (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, 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, 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 (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 (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 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 Receivable 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).
|
|
||
|
|
|
|||
|
10.3
|
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).
|
|
||
|
|
|
|||
|
10.4
|
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 and Exhibit 10.1, Current Report on Form 8-K
dated August 17, 2001, File No. 1-11083).
|
|
||
|
|
|
|||
|
10.5
|
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).
|
|
||
|
|
|
|||
|
10.6
|
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).
|
|
||
148
|
10.7
|
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).
|
|||
|
10.8
|
Form
of Amendment No. 1 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 10.2, 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 Cochlear Implant Business Purchase and Sale Agreement among the
Company, Boston Scientific Scimed, Inc., Advanced Bionics Corporation and
Advanced Bionics Holding Corporation dated as of August 9, 2007 (Exhibit
10.3, Current Report on Form 8-K dated August 9, 2007, File No.
1-11083).
|
|||
|
10.11
|
Form
of Amendment No. 1 to Cochlear Implant Business Purchase and Sale
Agreement among the Company, Boston Scientific Scimed, Inc., Advanced
Bionics Corporation and Advanced Bionics Holding Corporation dated as of
August 9, 2007 (Exhibit 10.2, Current Report on Form 8-K dated January 3,
2008, File No. 1-11083).
|
|||
|
*10.12
|
Form
of Purchase Agreement dated as of November 5, 2007 by and among Boston
Scientific Corporation, the Sellers and Getinge AB.
|
|||
|
10.13
|
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).
|
|
||
|
|
|
|||
|
10.14
|
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).
|
|
||
|
|
|
|||
|
10.15
|
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).
|
|
||
|
|
|
|||
|
10.16
|
Form
of Indemnification Agreement between the Company and certain Directors and
Officers (Exhibit 10.16, Registration No. 33-46980).
|
|
||
|
|
|
|||
|
10.17
|
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, File No. 1-11083).
|
|
||
|
|
|
|||
|
10.18
|
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).
|
|
||
|
|
|
|||
|
10.19
|
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).
|
|
||
|
*10.20
|
Form
of Non-Qualified Stock Option Agreement (vesting over two
years).
|
|||
|
|
|
|||
|
10.21
|
Form
of Restricted Stock Award Agreement (Exhibit 10.3, Current Report on Form
8-K dated December 10, 2004, File No. 1-11083).
|
|
||
|
|
|
|||
|
10.22
|
Form
of Deferred Stock Unit Award Agreement (Exhibit 10.4, Current Report on
Form 8-K dated December 10, 2004, File No. 1-11083).
|
|
||
|
|
|
149
|
10.23
|
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).
|
|
||
|
*10.24
|
Form
of Deferred Stock Unit Award Agreement (vesting over two
years).
|
|||
|
|
|
|||
|
10.25
|
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).
|
|
||
|
|
|
|||
|
10.26
|
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).
|
|
||
|
|
|
|||
|
10.27
|
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).
|
|
||
|
|
|
|||
|
10.28
|
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, and Exhibit
10.21, Annual Report on Form 10-K for year ended December 31, 2007, File
No. 1-11083).
|
|
||
|
|
|
|||
|
10.29
|
Boston
Scientific Corporation Global Employee Stock Ownership Plan, as Amended
and Restated (Exhibit 10.18, Annual Report on Form 10-K for the year ended
December 31, 1997, Exhibit 10.21, Annual Report on Form 10-K for the year
ended December 31, 2000, Exhibit 10.22, Annual Report on Form 10-K for the
year ended December 31, 2000 and Exhibit 10.14, Annual Report on Form 10-K
for the year ended December 31, 2003, File No. 1-11083).
|
|
||
|
|
|
|||
|
10.30
|
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).
|
|
||
|
|
|
|||
|
10.31
|
Boston
Scientific Corporation Deferred Compensation Plan, Effective January 1,
1996 (Exhibit 10.17, Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-11083).
|
|
||
|
|
|
|||
|
10.32
|
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).
|
|
||
|
|
|
|||
|
10.33
|
Boston
Scientific Corporation 2003 Long-Term Incentive Plan, as amended (Exhibit
10.17, Annual Report on Form 10-K for the year ended December 31, 2003 and
Exhibit 10.3, Current Report on Form 8-K dated May 9, 2005, File No.
1-11083).
|
|
||
|
|
|
|||
|
10.34
|
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, File No.
1-11083).
|
|
||
|
|
|
|||
|
10.35
|
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).
|
|
||
|
|
|
150
|
10.36
|
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).
|
|
||
|
|
|
|||
|
10.37
|
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).
|
|
||
|
|
|
|||
|
10.38
|
Form
of Boston Scientific Corporation Excess Benefit Plan (Exhibit 10.1,
Current Report on Form 8-K dated June 29, 2005, File No.
1-11083).
|
|
||
|
|
|
|||
|
10.39
|
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).
|
|
||
|
|
|
|||
|
10.40
|
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).
|
|
||
|
|
|
|||
|
10.41
|
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).
|
|
||
|
10.42
|
Form
of 2007 Performance Incentive Plan, as amended (Exhibit 10.2, Current
Report on Form 8-K dated February 20, 2007 and Exhibit 10.1, Current
Report on Form 8-K dated July 31, 2007, File No. 1-11083).
|
|||
|
|
|
|||
|
10.43
|
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).
|
|
||
|
|
|
|||
|
10.44
|
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).
|
|
||
|
|
|
|||
|
10.45
|
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).
|
|
||
|
|
|
|||
|
10.46
|
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).
|
|
||
|
|
|
|||
|
10.47
|
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).
|
|
||
|
|
|
|||
|
10.48
|
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).
|
|
||
|
|
|
|||
|
10.49
|
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).
|
|
||
|
|
|
|||
|
10.50
|
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).
|
|
||
|
|
|
|||
|
10.51
|
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).
|
|
||
|
|
|
151
|
10.52
|
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).
|
|
||
|
|
|
|||
|
10.53
|
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).
|
|
||
|
|
|
|||
|
10.54
|
Form
of Guidant Corporation Restricted Stock Grant (Exhibit 10.50, Annual
Report on Form 10-K for year ended December 31, 2006, File No.
1-11083).
|
|
||
|
|
|
|||
|
10.55
|
The
Guidant Corporation Employee Savings and Stock Ownership Plan, as amended
(Exhibits 10.51, 10.52, 10.53, 10.54, 10.55 and 10.56, Annual Report on
Form 10-K for the year ended December 31, 2006, File No.
1-11083).
|
|
||
|
|
|
|||
|
10.56
|
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).
|
|
||
|
|
|
|||
|
10.57
|
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).
|
|
||
|
|
|
|||
|
10.58
|
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).
|
|
||
|
|
|
|||
|
10.59
|
Promissory
Note between BSC International Holding Limited (“Borrower”) and Abbott
Laboratories (“Lender”) dated April 21, 2006 (Exhibit 10.4, Quarterly
Report on Form 10-Q for the quarter ended June 30, 2006, File No.
1-11083).
|
|
||
|
|
|
|||
|
10.60
|
Subscription
and Stockholder Agreement between Boston Scientific Corporation and Abbott
Laboratories dated April 21, 2006, as amended (Exhibit 10.5 and Exhibit
10.6, Quarterly Report on Form 10-Q for the quarter ended June 30, 2006,
File No. 1-11083).
|
|
||
|
|
|
|||
|
10.61
|
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).
|
|
||
|
|
|
|||
|
10.62
|
Boston
Scientific Executive Allowance Plan, as amended (Exhibit 10.53, Annual
Report on Form 10-K for year ended December 31, 2005 and Exhibit 10.1,
Current Report on Form 8-K dated October 30, 2007, File No.
1-11083).
|
|
||
|
|
|
|||
|
10.63
|
Boston
Scientific Executive Retirement Plan (Exhibit 10.54, Annual Report on Form
10-K for year ended December 31, 2005, File No. 1-11083).
|
|
||
|
|
|
|||
|
10.64
|
Form
of Deferred Stock Unit Agreement between James R. Tobin and the Company
dated February 28, 2006 (2003 Long-Term Incentive Plan) (Exhibit
10.56, Annual Report on Form 10-K for year ended December 31, 2005, File
No. 1-11083).
|
|
||
|
|
|
|||
|
10.65
|
Form
of Deferred Stock Unit Agreement between James R. Tobin and the Company
dated February 28, 2006 (2000 Long-Term Incentive Plan) (Exhibit
10.57, Annual Report on Form 10-K for year ended December 31, 2005, File
No. 1-11083).
|
|
||
|
|
|
152
|
10.66
|
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).
|
|
||
|
|
||||
|
10.67
|
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).
|
|||
|
10.68
|
Form
of Deferred Stock Unit Award dated June 5, 2007 between Boston Scientific
and Sam R. Leno (Exhibit 10.1, Quarterly Report on Form 10Q for period
ended June 30, 2007, File No. 1-11083).
|
|||
|
10.69
|
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).
|
|||
|
*11
|
Statement
regarding computation of per share earnings (included in Note O to the
Company's 2007 consolidated financial statements for the year ended
December 31, 2007 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, 2008.
|
|
||
|
|
|
|||
|
*23
|
Consent
of Independent Auditors, 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.
|
|
153
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.
|
BOSTON
SCIENTIFIC CORPORATION
|
|||
|
Dated:
February 27, 2008
|
By:
|
/s/ Sam R. Leno | |
|
Sam
R. Leno
|
|||
|
Chief
Financial 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, 2008
|
By:
|
/s/ John E. Abele | |
|
John
E. Abele
|
|||
|
Director,
Founder
|
|
Dated:
February 27, 2008
|
By:
|
/s/ Ursula M. Burns | |
|
Ursula
M. Burns
|
|||
|
Director
|
|
Dated:
February 27, 2008
|
By:
|
/s/ Nancy-Ann DeParle | |
|
Nancy-Ann
DeParle
|
|||
|
Director
|
|
Dated:
February 27, 2008
|
By:
|
/s/ J. Raymond Elliott | |
|
J.
Raymond Elliott
|
|||
|
Director
|
154
|
Dated:
February 27, 2008
|
By:
|
/s/ Joel L. Fleishman | |
|
Joel
L. Fleishman
|
|||
|
Director
|
|
Dated:
February 27, 2008
|
By:
|
/s/ Marye Anne Fox, Ph.D. | |
|
Marye
Anne Fox, Ph.D.
|
|||
|
Director
|
|
Dated:
February 27, 2008
|
By:
|
/s/ Ray J. Groves | |
|
Ray
J. Groves
|
|||
|
Director
|
|
Dated:
February 27, 2008
|
By:
|
/s/ Kristina M. Johnson | |
|
Kristina
M. Johnson
|
|||
|
Director
|
|
Dated:
February 27, 2008
|
By:
|
/s/ Ernest Mario, Ph.D. | |
|
Ernest
Mario, Ph.D.
|
|||
|
Director
|
|
Dated:
February 27, 2008
|
By:
|
/s/ N.J. Nicholas, Jr. | |
|
N.J.
Nicholas, Jr.
|
|||
|
Director
|
|
Dated:
February 27, 2008
|
By:
|
/s/ Pete M. Nicholas | |
|
Pete
M. Nicholas
|
|||
|
Director,
Founder, Chairman of the Board
|
155
|
Dated:
February 27, 2008
|
By:
|
/s/ John E. Pepper | |
|
John
E. Pepper
|
|||
|
Director
|
|
Dated:
February 27, 2008
|
By:
|
/s/ Uwe E. Reinhardt, Ph.D. | |
|
Uwe
E. Reinhardt, Ph.D.
|
|||
|
Director
|
|
Dated:
February 27, 2008
|
By:
|
/s/ Warren B. Rudman | |
|
Warren
B. Rudman
|
|||
|
Director
|
|
Dated:
February 27, 2008
|
By:
|
/s/ James R. Tobin | |
|
James
R. Tobin
|
|||
|
Director,
President and Chief Executive Officer
|
|||
|
(Principal
Executive Officer)
|
156
Schedule II
VALUATION AND QUALIFYING ACCOUNTS (in
millions)
The
following is a rollforward of our allowances for uncollectible amounts and sales
returns:
|
Description
|
Balance
Beginning
of Year
|
Charges to Costs and
Expenses
|
Deductions to Allowances for
Uncollectible Amounts (a)
|
Charges to (Deductions from)
Other Accounts (b)
|
Balance at
End of
Year
|
|||||||||||||||
|
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 | |||||||||||||
|
Year Ended December 31,
2005
|
||||||||||||||||||||
|
Allowances
for uncollectible accounts and sales returns and
allowances
|
$ | 80 | 9 | 8 | 2 | $ | 83 | |||||||||||||
(a) Uncollectible
amounts written off.
(b) Represents
charges for sales returns and allowances, net of actual sales returns, as well
as impact of foreign currency.
157