WWW.EXFILE.COM, INC. -- 888-775-4789 -- BOSTON SCIENTIFIC CORPORATION -- FORM 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO
SECTION
13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended June 30, 2008
|
Commission
File No. 1-11083
|
BOSTON
SCIENTIFIC CORPORATION
(Exact
Name of Registrant As Specified in Its Charter)
DELAWARE
|
04-2695240
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification No.)
|
ONE
BOSTON SCIENTIFIC PLACE, NATICK, MASSACHUSETTS 01760-1537
(Address
of Principal Executive Offices)
(508)
650-8000
(Registrant’s
Telephone Number)
____________________________________________________________________________________________________________
(Former
name, former address and former fiscal year, if changed since last
report)
________________
Indicate
by check mark whether the registrant: (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 registrant 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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer x
|
Accelerated
filer ¨
|
Non-accelerated
filer o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company o
|
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
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
Common
Stock, $.01 par value
|
Shares
outstanding
as of July 31,
2008
1,500,640,038
|
TABLE
OF CONTENTS
Page No.
PART
I
|
FINANCIAL
INFORMATION
|
3
|
|
|
|
Item 1.
|
Condensed
Consolidated Financial Statements
|
3
|
|
Condensed
Consolidated Statements of Operations
Condensed
Consolidated Balance Sheets
|
3
|
4
|
|
Condensed
Consolidated Statements of Cash Flows
|
5
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
6
|
|
|
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
32
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
56
|
Item 4.
|
Controls
and Procedures
|
57
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
58
|
Item 1.
|
Legal
Proceedings
|
58
|
Item 1A.
|
Risk
Factors
|
58
|
Item 4.
Item 6.
|
Submissions
of Matters to a Vote of Security Holders
Exhibits
|
58
59
|
|
|
|
SIGNATURE
|
|
60
|
PART
I
FINANCIAL
INFORMATION
ITEM
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BOSTON
SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
(in
millions, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,024 |
|
|
$ |
2,071 |
|
|
$ |
4,071 |
|
|
$ |
4,157 |
|
Cost
of products sold
|
|
|
604 |
|
|
|
563 |
|
|
|
1,185 |
|
|
|
1,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,420 |
|
|
|
1,508 |
|
|
|
2,886 |
|
|
|
3,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
655 |
|
|
|
752 |
|
|
|
1,315 |
|
|
|
1,487 |
|
Research
and development expenses
|
|
|
253 |
|
|
|
275 |
|
|
|
497 |
|
|
|
564 |
|
Royalty
expense
|
|
|
48 |
|
|
|
51 |
|
|
|
94 |
|
|
|
103 |
|
Amortization
expense
|
|
|
135 |
|
|
|
158 |
|
|
|
279 |
|
|
|
312 |
|
Purchased
research and development
|
|
|
16 |
|
|
|
(8 |
) |
|
|
29 |
|
|
|
(3 |
) |
Restructuring
charges
|
|
|
10 |
|
|
|
|
|
|
|
39 |
|
|
|
|
|
Gain
on divestitures
|
|
|
|
|
|
|
|
|
|
|
(250 |
) |
|
|
|
|
Total
operating expenses
|
|
|
1,117 |
|
|
|
1,228 |
|
|
|
2,003 |
|
|
|
2,463 |
|
Operating
income
|
|
|
303 |
|
|
|
280 |
|
|
|
883 |
|
|
|
563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(118 |
) |
|
|
(146 |
) |
|
|
(249 |
) |
|
|
(287 |
) |
Other,
net
|
|
|
(85 |
) |
|
|
(8 |
) |
|
|
(72 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
100 |
|
|
|
126 |
|
|
|
562 |
|
|
|
286 |
|
Income
tax expense
|
|
|
2 |
|
|
|
11 |
|
|
|
142 |
|
|
|
51 |
|
Net
income
|
|
$ |
98 |
|
|
$ |
115 |
|
|
$ |
420 |
|
|
$ |
235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share — basic
|
|
$ |
0.07 |
|
|
$ |
0.08 |
|
|
$ |
0.28 |
|
|
$ |
0.16 |
|
Net
income per common share — assuming dilution
|
|
$ |
0.07 |
|
|
$ |
0.08 |
|
|
$ |
0.28 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,497.6 |
|
|
|
1,485.4 |
|
|
|
1,495.8 |
|
|
|
1,483.4 |
|
Assuming
dilution
|
|
|
1,505.2 |
|
|
|
1,499.9 |
|
|
|
1,502.6 |
|
|
|
1,498.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes
to the unaudited condensed consolidated financial statements.
BOSTON
SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
June
30,
|
|
|
December
31,
|
|
(in
millions, except share data)
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,616 |
|
|
$ |
1,452 |
|
Trade
accounts receivable, net
|
|
|
1,416 |
|
|
|
1,502 |
|
Inventories
|
|
|
812 |
|
|
|
725 |
|
Deferred
income taxes
|
|
|
931 |
|
|
|
679 |
|
Assets
held for sale
|
|
|
|
|
|
|
1,099 |
|
Prepaid
expenses and other current assets
|
|
|
393 |
|
|
|
464 |
|
Total
current assets
|
|
|
5,168 |
|
|
|
5,921 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,738 |
|
|
|
1,735 |
|
Investments
|
|
|
122 |
|
|
|
317 |
|
Other
assets
|
|
|
113 |
|
|
|
157 |
|
Goodwill
and other intangible assets, net
|
|
|
22,760 |
|
|
|
23,067 |
|
|
|
$ |
29,901 |
|
|
$ |
31,197 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Current
debt obligations
|
|
$ |
271 |
|
|
$ |
256 |
|
Accounts
payable
|
|
|
222 |
|
|
|
139 |
|
Accrued
expenses
|
|
|
2,199 |
|
|
|
2,541 |
|
Taxes
payable
|
|
|
167 |
|
|
|
122 |
|
Liabilities
associated with assets held for sale
|
|
|
|
|
|
|
39 |
|
Other
current liabilities
|
|
|
176 |
|
|
|
153 |
|
Total
current liabilities
|
|
|
3,035 |
|
|
|
3,250 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
7,014 |
|
|
|
7,933 |
|
Deferred
income taxes
|
|
|
2,252 |
|
|
|
2,284 |
|
Other
long-term liabilities
|
|
|
1,965 |
|
|
|
2,633 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $ .01 par value - authorized 50,000,000 shares,
none issued and outstanding
|
|
|
|
|
|
|
|
|
Common
stock, $ .01 par value - authorized 2,000,000,000 shares
and issued 1,498,772,530 shares at
June
30, 2008 and
1,491,234,911 shares at December
31, 2007
|
|
|
15 |
|
|
|
15 |
|
Additional
paid-in capital
|
|
|
15,892 |
|
|
|
15,766 |
|
Accumulated
deficit
|
|
|
(275 |
) |
|
|
(693 |
) |
Other
stockholders’ equity
|
|
|
3 |
|
|
|
9 |
|
Total
stockholders’ equity
|
|
|
15,635 |
|
|
|
15,097 |
|
|
|
$ |
29,901 |
|
|
$ |
31,197 |
|
See notes
to the unaudited condensed consolidated financial statements.
BOSTON
SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Six
Months Ended
June
30,
|
|
(in millions) |
|
2008
|
|
|
2007
|
|
Cash
provided by operating activities
|
|
$ |
524 |
|
|
$ |
152 |
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Net
purchases of property, plant and equipment
|
|
|
(136 |
) |
|
|
(186 |
) |
Proceeds
from sales of publicly traded and privately held equity securities
and collections
of notes receivable
|
|
|
47 |
|
|
|
49 |
|
Payments
for acquisitions of businesses, net of cash acquired
|
|
|
(21 |
) |
|
|
(11 |
) |
Payments
relating to prior period acquisitions
|
|
|
(669 |
) |
|
|
(213 |
) |
Net
proceeds from business divestitures
|
|
|
1,288 |
|
|
|
|
|
Payments
for investments in companies and acquisitions of certain
technologies
|
|
|
(11 |
) |
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
Cash
provided by (used for) investing activities
|
|
|
498 |
|
|
|
(402 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Net
payments on notes payable, capital leases and long-term
borrowings
|
|
|
(912 |
) |
|
|
(4 |
) |
Proceeds
from issuances of shares of common stock
|
|
|
48 |
|
|
|
91 |
|
Excess
tax benefit from option exercises
|
|
|
4 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
Cash
(used for) provided by financing activities
|
|
|
(860 |
) |
|
|
94 |
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rates on cash
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
164 |
|
|
|
(154 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
1,452 |
|
|
|
1,668 |
|
Cash
and cash equivalents at end of period
|
|
$ |
1,616 |
|
|
$ |
1,514 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
and stock equivalents issued for acquisitions
|
|
$ |
|
|
|
$ |
90 |
|
|
|
|
|
|
|
|
|
|
See notes
to the unaudited condensed consolidated financial statements.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
A – BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements of Boston
Scientific Corporation have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary
for fair presentation have been included. Operating results for the three
and six months ended June 30, 2008 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2008. For further
information, refer to the consolidated financial statements and footnotes
thereto included in our Annual Report on Form 10-K for the year ended December
31, 2007.
Certain
prior year amounts have been reclassified to conform to the current year
presentation. See Note N
- Segment Reporting for further details.
NOTE
B – FAIR VALUE MEASUREMENTS
We
adopted Financial Accounting Standards Board (FASB) Statement No. 157,
Fair Value
Measurements, as of January 1, 2008. Statement No. 157 defines fair
value, establishes a framework for measuring fair value in accordance with U.S.
GAAP, and expands disclosures about fair value measurements. Statement No. 157
does not require any new fair value measurements; rather, it applies to other
accounting pronouncements that require or permit fair value measurements. In
February 2008, the FASB released Staff Position No. 157-2, Effective Date of FASB Statement
No. 157, which delays the effective date of Statement No. 157
for all nonfinancial assets and nonfinancial liabilities, except for those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis. In accordance with Staff Position No. 157-2, we have not
applied the provisions of Statement No. 157 to the following nonfinancial assets
and nonfinancial liabilities:
|
·
|
Nonfinancial
assets and nonfinancial liabilities initially measured at fair value in a
business combination or other new basis event, but not measured at fair
value in subsequent reporting
periods;
|
|
·
|
Reporting
units and nonfinancial assets and nonfinancial liabilities measured at
fair value for our goodwill impairment test in accordance with FASB
Statement No. 142, Goodwill and Other Intangible
Assets;
|
|
·
|
Indefinite-lived
intangible assets measured at fair value for impairment assessment in
accordance with Statement No.
142;
|
|
·
|
Nonfinancial
long-lived assets or asset groups measured at fair value for impairment
assessment or disposal under FASB Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets; and
|
|
·
|
Nonfinancial
liabilities associated with exit or disposal activities initially measured
at fair value under FASB Statement No. 146, Accounting for Costs
Associated with Exit or Disposal
Activities.
|
We will
be required to apply the provisions of Statement No. 157 to these nonfinancial
assets and nonfinancial liabilities as of January 1, 2009 and are currently
evaluating the impact of the application of Statement No. 157 as it
pertains to these items. The application of Statement No. 157 for financial
assets and financial liabilities did not have a material impact on our financial
position, results of operations or cash flows.
On a
recurring basis, we measure certain financial assets and financial liabilities
at fair value, including our money market funds and U.S. Treasury securities,
available-for-sale investments, interest rate derivative instruments and foreign
currency derivative contracts. Statement No. 157 defines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. As
such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would use in pricing an asset or
liability. We base fair value upon quoted market prices, where available. Where
quoted market prices or other observable inputs are not available, we apply
valuation techniques to estimate fair value.
Statement
No. 157 establishes a three-level valuation hierarchy for disclosure of fair
value measurements. The categorization of financial assets and financial
liabilities within the valuation hierarchy is based upon the lowest level of
input that is significant to the measurement of fair value. The three levels of
the hierarchy are defined as follows:
·
|
Level
1 – Inputs to the valuation methodology are quoted market prices for
identical assets or liabilities.
|
·
|
Level
2 – Inputs to the valuation methodology are other observable inputs,
including quoted market prices for similar assets or liabilities and
market-corroborated inputs.
|
·
|
Level
3 – Inputs to the valuation methodology are unobservable inputs based on
management’s best estimate of inputs market participants would use in
pricing the asset or liability at the measurement date, including
assumptions about risk.
|
Our money
market funds and U.S. Treasury securities, as well as available-for-sale
investments carried at fair value are generally classified within Level 1
of the fair value hierarchy because they are valued using quoted market prices.
However, as of June 30, 2008, certain of our available-for-sale investments have
been marked to fair value based on agreements to sell those investments to a
third party, which are subject to closing and other conditions. We have
classified these investments within Level 3 of the fair value hierarchy. See
below and Note D – Investments
and Notes Receivable for further discussion.
Our cost
method investments are recorded at fair value only when impairment charges are
recorded for other-than-temporary declines in value and are determined using
fair value criteria within the framework of Statement No. 157. As the
inputs utilized for the impairment assessment are not based on observable market
data, these cost method investments are classified within Level 3 of the fair
value hierarchy on a non-recurring basis.
We
recognize all derivative financial instruments in our consolidated financial
statements at fair value in accordance with FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. We determine the fair
value of these instruments using the framework prescribed by Statement No. 157
by considering the estimated amount we would receive to terminate these
agreements at the reporting date and by taking into account current interest
rates, the creditworthiness of the counterparty for assets, and our
creditworthiness for liabilities. In certain instances, we may
utilize financial models to measure fair value. Generally, we use inputs that
include quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in markets that are
not active; other observable inputs for the asset or liability; and inputs
derived principally from, or corroborated by, observable market data by
correlation or other means. We have classified our derivative assets and
liabilities within Level 2 of the fair value hierarchy because these observable
inputs are available for substantially the full term of our derivative
instruments.
Fair
Value Measured on a Recurring Basis
Financial
assets and financial liabilities measured at fair value on a recurring basis
consist of the following as of June 30, 2008:
(in
millions)
|
|
Quoted
Market
Prices
for
Identical
Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds and U.S. Treasury securities
|
|
$ |
542 |
|
|
|
|
|
|
|
|
$ |
542 |
|
Available-for-sale
investments
|
|
|
13 |
|
|
|
|
|
$ |
17 |
|
|
|
30 |
|
Currency
exchange contracts
|
|
|
|
|
|
$ |
47 |
|
|
|
|
|
|
|
47 |
|
|
|
$ |
555 |
|
|
$ |
47 |
|
|
$ |
17 |
|
|
$ |
619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
exchange contracts
|
|
|
|
|
|
$ |
157 |
|
|
|
|
|
|
$ |
157 |
|
Interest
rate swap contracts
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
$ |
|
|
|
$ |
159 |
|
|
$ |
|
|
|
$ |
159 |
|
For
assets measured at fair value using significant unobservable inputs (Level 3),
the following table summarizes the change in balances during the six months
ended June 30, 2008 (in millions):
Balance
at January 1, 2008
|
|
$ |
30 |
|
Net
transfers (out) in of Level 3
|
|
|
31 |
|
Net
(sales) purchases
|
|
|
(27 |
) |
Realized
losses related to investment impairments
|
|
|
(1 |
) |
Change
in unrealized gains/losses related to market prices
|
|
|
(16 |
) |
Change
in unrealized gains/losses related to liquidity discounts
|
|
|
|
|
Balance
at June 30, 2008
|
|
$ |
17 |
|
Unrealized
gains/losses are included in other comprehensive income in our accompanying
unaudited condensed consolidated balance sheets.
Fair
Value Measured on a Non-Recurring Basis
During
the first half of 2008, we recorded impairment charges on certain of our cost
method investments and adjusted the carrying amount of those investments to fair
value, as we deemed the decline in the value of those assets to be
other-than-temporary. These impairment charges relate primarily to
our investments in, and notes receivable from, certain entities that we agreed
to sell during the second quarter of 2008. See Note D – Investments and Notes
Receivable for further discussion. These cost method investments fall
within Level 3 of the fair value hierarchy, due to the use of significant
unobservable inputs to determine fair value, as the investments are in privately
held entities without quoted market prices. To determine the fair
value of those investments, we used all available financial information related
to the entities, including information based on recent third-party equity
investments in these entities and information from our agreements to sell
certain of these investments. The following table summarizes changes
to the carrying amount of these investments during the six months ended June 30,
2008 (in millions).
|
|
|
|
Balance
at January 1, 2008
|
|
$ |
24 |
|
Net
transfers in (out) of Level 3
|
|
|
167 |
|
Other-than-temporary
impairments
|
|
|
(112 |
) |
Balance
at June 30, 2008
|
|
$ |
79 |
|
Statement
No. 159
In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, which allows an entity to elect to
record financial assets and financial liabilities at fair value upon their
initial recognition on a contract-by-contract basis. We adopted Statement No.
159 as of January 1, 2008 and did not elect the fair value option for our
eligible financial assets and financial liabilities.
NOTE
C – SUPPLEMENTAL BALANCE SHEET INFORMATION
The
following are the components of various balance sheet items at June 30, 2008 and
December 31, 2007.
Inventories
|
|
June
30,
|
|
|
December
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
530 |
|
|
$ |
454 |
|
Work-in-process
|
|
|
144 |
|
|
|
132 |
|
Raw
materials
|
|
|
138 |
|
|
|
139 |
|
|
|
$ |
812 |
|
|
$ |
725 |
|
Property, plant and
equipment, net
|
|
June
30,
|
|
|
December
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$ |
3,091 |
|
|
$ |
2,925 |
|
Less:
accumulated depreciation
|
|
|
1,353 |
|
|
|
1,190 |
|
|
|
$ |
1,738 |
|
|
$ |
1,735 |
|
Goodwill and other
intangible assets, net
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
15,067 |
|
|
$ |
15,103 |
|
Technology
- core
|
|
|
6,930 |
|
|
|
6,923 |
|
Other
intangible assets
|
|
|
2,465 |
|
|
|
2,481 |
|
|
|
|
24,462 |
|
|
|
24,507 |
|
Less:
accumulated amortization
|
|
|
1,702 |
|
|
|
1,440 |
|
|
|
$ |
22,760 |
|
|
$ |
23,067 |
|
Changes
in our product warranty obligations during the six months ended June 30, 2008
consisted of the following (in millions):
Balance
at December 31, 2007
|
|
$ |
66 |
|
Warranty
claims provision
|
|
|
30 |
|
Settlements
made
|
|
|
(32 |
) |
Balance
at June 30, 2008
|
|
$ |
64 |
|
NOTE
D – INVESTMENTS AND NOTES RECEIVABLE
During
2007, in connection with our strategic initiatives described in Item 2 - Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
we announced our intent to sell the majority of our investment portfolio in
order to monetize those investments determined to be non-strategic. In June
2008, we signed definitive agreements to sell the majority of our investments
in, and notes receivable from, certain publicly traded and privately held
entities for gross proceeds of approximately $140 million. In connection with
these agreements, and the sale of certain other non-strategic investments during
the quarter, we recognized pre-tax losses of $96 million ($64 million after-tax)
in the second quarter of 2008. We expect to recognize partially offsetting gains
upon the closing of these transactions in the second half of 2008. In addition,
we recorded net losses of $2 million during the second quarter of 2008 related
primarily to investments accounted for under the equity method of
accounting.
During
the first half of 2008, we recognized net pre-tax losses of $104 million related
to our investment portfolio, as compared to $20 million for the first half of
2007.
NOTE
E – BORROWINGS AND CREDIT ARRANGEMENTS
We had
total debt of $7.285 billion at June 30, 2008 at an average interest rate of
5.90 percent, as compared to total debt of $8.189 billion at December 31,
2007 at an average interest rate of 6.36 percent. During the first half of
2008, we prepaid $925 million of our term loan. These prepayments satisfied the
remaining $300 million of our term loan due in 2009 and $625 million of our term
loan due in 2010. As of June 30, 2008, the revised debt maturity schedule
for our term loan, as well as scheduled maturities of the other significant
components of our debt obligations, is as follows:
|
|
Payments
Due by Period
|
|
|
|
|
(in
millions)
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
Term
loan
|
|
|
|
|
|
|
|
|
$ |
1,075 |
|
|
$ |
2,000 |
|
|
|
|
|
|
|
|
|
$ |
3,075 |
|
Abbott
Laboratories loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
900 |
|
Senior
notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
850 |
|
|
|
|
|
|
$ |
2,200 |
|
|
|
3,050 |
|
Credit
and security facility
|
|
$ |
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
$ |
250 |
|
|
$ |
|
|
|
$ |
1,075 |
|
|
$ |
3,750 |
|
|
$ |
|
|
|
$ |
2,200 |
|
|
$ |
7,275 |
|
|
Note:
|
The
table above does not include capital leases, discounts associated
with our Abbott loan and senior notes, or non-cash gains related to
interest rate swaps used to hedge the fair value of certain of our senior
notes.
|
In July
2008, following the receipt of a $250 million milestone payment from Abbott
Laboratories, we repaid the $250 million of borrowings under our credit and
security facility. Additionally, we extended the maturity of this facility to
August 2009.
Our term
loan and revolving credit facility agreement requires that we maintain certain
financial covenants, including a ratio of total debt to EBITDA, as defined by
the agreement, as amended, for the preceding four consecutive
fiscal quarters of less than or equal to
4.5 to 1.0 through December 31, 2008. The maximum permitted ratio of total debt
to EBITDA steps-down to 4.0 to 1.0 on March 31, 2009 and to 3.5 to 1.0 on
September 30, 2009. The agreement also requires that we maintain a ratio
of EBITDA, as defined by the agreement, as amended, to interest expense
for the preceding four consecutive fiscal quarters of greater than
or equal
to 3.0 to 1.0. As of June 30, 2008, we were in compliance with the required
covenants. Exiting the quarter, our ratio of total debt to EBITDA was
approximately 2.8 to 1.0 and our ratio of EBITDA to interest expense was
4.9 to 1.0. If at any time we are not able to maintain these covenants, we could
be required to seek to renegotiate the terms of our credit facilities or seek
waivers from compliance with these covenants, both of which could result in
additional borrowing costs.
Interest
Rate Hedges
We use
interest rate derivative instruments to manage our exposure to interest rate
movements on portions of our debt 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, net of tax, until
the hedged cash flow occurs, at which point the effective portion of any gain or
loss is reclassified to earnings.
During
the first quarter of 2008, we entered floating-to-fixed interest rate swaps
indexed to three-month LIBOR to hedge variability in interest payments on $2.0
billion of our LIBOR-indexed floating-rate term loan. These interest rate swap
agreements mature in December 2009. We designated these interest rate
swaps as cash flow hedges under Statement No. 133 and record fluctuations
in the fair value of these derivative instruments as unrealized gains or losses
in other comprehensive income, net of tax, and reclassify the gains or losses to
interest expense during the hedged interest payment period.
NOTE
F – ACQUISITIONS
Purchased
Research and Development
In May
2008, we completed the acquisition of 100 percent of the fully diluted equity of
CryoCor, Inc., and paid a cash purchase price of $21 million. CryoCor is
developing products using cryogenic technology for use in treating atrial
fibrillation. In connection with the acquisition, we recorded pre-tax purchased
research and development charges of $16 million. The acquisition was intended to
allow us to further pursue therapeutic solutions for atrial fibrillation in
order to advance our existing Cardiac Rhythm Management (CRM) and
Electrophysiology product lines.
Our
policy is to record certain costs associated with strategic alliances as
purchased research and development. In accordance with this policy, we recorded
$13 million of purchased research and development in the first quarter of 2008
associated with entering a licensing and development arrangement for magnetic
resonance imaging (MRI)-safe technology.
Acquisition-related
Payments
During
the first half of 2008, we made acquisition-related payments of $669 million,
consisting primarily of a $650 million fixed payment made to the principal
former shareholders of Advanced Bionics Corporation in connection with our 2007
amendment to the original merger agreement, which was accrued at December 31,
2007. At June 30, 2008, we have accrued $480 million ($465 million as of
December 31, 2007), representing the present value of a $500 million final fixed
payment to be made related to Advanced Bionics in March 2009. In addition to
this obligation, certain of our acquisitions involve the payment of contingent
consideration, which is generally contingent upon the acquired companies’
reaching certain performance milestones, including attaining specified revenue
levels, achieving product development targets or obtaining regulatory approvals.
Consequently, we cannot currently determine the total required payments;
however, we have developed an estimate of the maximum potential contingent
consideration for each of our acquisitions with an outstanding
earn-out
obligation. The estimated maximum potential amount of future contingent
consideration (undiscounted) that we could be required to make associated with
these acquisitions, 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.
NOTE
G – RESTRUCTURING-RELATED ACTIVITIES
In
October 2007, our Board of Directors approved, and we committed to, an expense
and head count reduction plan, which we anticipate 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 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 better utilize 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 complete worldwide by
the end of 2008.
We expect
that the execution of this plan will result in total pre-tax expenses of
approximately $400 million to $425 million. We are recording a portion of
these expenses as restructuring charges and the remaining portion through other
lines within our consolidated statements of operations. We expect the plan
to result in cash payments of approximately $350 million to $375
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
|
$215
million to $225 million
|
Retention
incentives
|
$70
million to $75 million
|
Asset
write-offs and accelerated depreciation
|
$45
million to $50 million
|
Other
*
|
$70
million to $75 million
|
* Other costs consist
primarily of consultant fees and costs to transfer product lines from one
facility to another.
In the
second quarter of 2008, we recorded $10 million of restructuring
charges. In addition, we recorded $11 million of expenses within
other lines of our unaudited condensed consolidated statements of operations
related to our restructuring initiatives. The following presents these costs by
major type and line item within our unaudited condensed consolidated statements
of operations:
(in
millions)
|
|
Termination
Benefits
|
|
|
Retention
Incentives
|
|
|
Accelerated
Depreciation
|
|
|
Other
|
|
|
Total
|
|
Cost
of products sold
|
|
|
|
|
$ |
2 |
|
|
$ |
1 |
|
|
|
|
|
$ |
3 |
|
Selling,
general and administrative expenses
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
6 |
|
Research
and development expenses
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
2 |
|
Restructuring
charges
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10 |
|
|
|
10 |
|
|
|
$ |
|
|
|
$ |
10 |
|
|
$ |
1 |
|
|
$ |
10 |
|
|
$ |
21 |
|
In the
first half of 2008, we recorded $39 million of restructuring
charges. In addition, we recorded $26 million of expenses within
other lines of our unaudited condensed consolidated statements of operations
related to our restructuring initiatives. The following presents these costs by
major type and line item within our unaudited condensed consolidated statements
of operations:
(in
millions)
|
|
Termination
Benefits
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
Cost
of products sold
|
|
|
|
|
$ |
5 |
|
|
$ |
2 |
|
|
|
|
|
$ |
7 |
|
Selling,
general and administrative expenses
|
|
|
|
|
|
12 |
|
|
|
3 |
|
|
|
|
|
|
15 |
|
Research
and development expenses
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
4 |
|
Restructuring
charges
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
$ |
19 |
|
|
|
39 |
|
|
|
$ |
20 |
|
|
$ |
21 |
|
|
$ |
5 |
|
|
$ |
19 |
|
|
$ |
65 |
|
The
termination benefits recorded during the first half of 2008 represent amounts
incurred pursuant to our on-going benefit arrangements and amounts for
“one-time” involuntary termination benefits, and have been recorded in
accordance with FASB Statement No. 112, Employer’s Accounting for
Postemployment Benefits and FASB Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. We expect to record the 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. Retention incentives represent cash incentives, which are
being recorded over the future service period during which eligible employees
must remain employed with us in order to retain the payment. The
other restructuring costs are being recognized and measured at their fair value
in the period in which the liability is incurred, in accordance with Statement
No. 146.
We have
incurred cumulative restructuring-related costs of $270 million since we
committed to the plan in October 2007. The following presents these costs by
major type (in millions):
Termination
benefits
|
|
$ |
178 |
|
Retention
incentives
|
|
|
26 |
|
Intangible
asset write-offs
|
|
|
21 |
|
Fixed
asset write-offs
|
|
|
8 |
|
Accelerated
depreciation
|
|
|
8 |
|
Other
|
|
|
29 |
|
|
|
$ |
270 |
|
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.
In the
second quarter of 2008, we made cash payments of approximately $41 million
associated with our restructuring initiatives, which related to termination
benefits paid and other restructuring charges. We have made
cumulative cash payments of $167 million since we committed to our restructuring
initiatives in October 2007. These payments were made using cash generated from
our operations. We expect to make the remaining cash payments during
the remainder of 2008 and 2009 using cash generated from
operations.
The
following is a rollforward of the liability associated with our restructuring
initiatives since the inception of the plan in the fourth quarter of 2007, which
is reported as a component of accrued expenses included in our accompanying
unaudited condensed consolidated balance sheets.
(in
millions)
|
|
Termination
Benefits
|
|
|
Other
|
|
|
Total
|
|
Charges
|
|
$ |
158 |
|
|
$ |
10 |
|
|
$ |
168 |
|
Cash
payments
|
|
|
(23 |
) |
|
|
(8 |
) |
|
|
(31 |
) |
Balance
at December 31, 2007
|
|
|
135 |
|
|
|
2 |
|
|
|
137 |
|
Charges
|
|
|
20 |
|
|
|
19 |
|
|
|
39 |
|
Cash
payments
|
|
|
(102 |
) |
|
|
(19 |
) |
|
|
(121 |
) |
Balance
at June 30, 2008
|
|
$ |
53 |
|
|
$ |
2 |
|
|
$ |
55 |
|
In
addition to the amounts in the rollforward above, we have incurred cumulative
charges of $63 million associated with retention incentives, and asset
write-offs and accelerated depreciation; and have made cumulative cash payments
of $15 million associated with retention incentives.
NOTE
H – DIVESTITURES
During
the first quarter of 2008, in connection with our strategic initiatives, we
completed the sale of our Auditory, Cardiac Surgery, Vascular
Surgery, Fluid Management and Venous Access businesses, as well as our
TriVascular Endovascular Aortic Repair (EVAR) program. Each transaction is
discussed below in further detail.
Auditory
In
January 2008, we completed the sale of a controlling interest in our Auditory
business and drug pump development program, acquired with Advanced Bionics in
2004, to entities affiliated with the principal former shareholders of Advanced
Bionics for an aggregate purchase price of $150 million in cash. To adjust the carrying
value of the disposal group to its fair value, less costs to sell, we recorded a
loss of approximately $367 million (pre-tax) in 2007, representing primarily a
write-down of goodwill. In addition, we recorded a tax benefit of $6 million in
the first quarter of 2008 in connection with the closing of the transaction.
Under the terms of the agreement, we retained 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 Emerging Issues
Task Force (EITF) Issue No. 03-16, Accounting for Investments in
Limited Liability Companies, we are accounting for these investments
under the equity method of accounting.
Cardiac
Surgery and Vascular Surgery
In
January 2008, we completed the sale of our Cardiac Surgery and Vascular Surgery
businesses to the Getinge Group for net cash proceeds of approximately $705
million. To adjust the carrying value of the Cardiac Surgery and Vascular
Surgery disposal group to its fair value, less costs to sell, we recorded a loss
of approximately $193 million in 2007, representing primarily the write-down of
goodwill. In addition, we recorded a tax expense of $56 million in the first
quarter of 2008 in connection with the closing of the
transaction.
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 net cash proceeds of approximately
$415 million. We recorded a pre-tax gain of $234 million ($129 million
after-tax) during the first quarter of 2008 associated with this
transaction.
TriVascular
EVAR Program
In March
2008, we sold our EVAR program obtained in connection with our 2005 acquisition
of TriVascular, Inc. for $30 million in cash. We discontinued our EVAR program
in 2006. In connection with the sale, we recorded a pre-tax gain of $16 million
($35 million after-tax) in the first quarter of 2008.
NOTE
I – COMPREHENSIVE INCOME
The
following table provides a summary of our comprehensive income:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
98 |
|
|
$ |
115 |
|
|
$ |
420 |
|
|
$ |
235 |
|
Currency
translation adjustment
|
|
|
20 |
|
|
|
26 |
|
|
|
30 |
|
|
|
25 |
|
Net
change in derivative financial instruments
|
|
|
65 |
|
|
|
(4 |
) |
|
|
(28 |
) |
|
|
(4 |
) |
Net
change in equity investments
|
|
|
(1 |
) |
|
|
14 |
|
|
|
(8 |
) |
|
|
9 |
|
Other
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
Comprehensive
income
|
|
$ |
182 |
|
|
$ |
151 |
|
|
$ |
412 |
|
|
$ |
265 |
|
NOTE
J – WEIGHTED-AVERAGE SHARES OUTSTANDING
The
following is a reconciliation of weighted-average shares outstanding for basic
and diluted earnings per share computations:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Weighted
average shares outstanding - basic
|
|
|
1,497.6 |
|
|
|
1,485.4 |
|
|
|
1,495.8 |
|
|
|
1,483.4 |
|
Net
effect of common stock equivalents
|
|
|
7.6 |
|
|
|
14.5 |
|
|
|
6.8 |
|
|
|
15.5 |
|
Weighted
average shares outstanding - assuming dilution
|
|
|
1,505.2 |
|
|
|
1,499.9 |
|
|
|
1,502.6 |
|
|
|
1,498.9 |
|
Weighted-average
shares outstanding, assuming dilution, excludes the impact of 41.5 million stock
options for the second quarter of 2008, 40.8 million for the second quarter of
2007, 49.3 million for the first half of 2008, and 39.2 million for the first
half of 2007 due to the exercise prices of these stock options being greater
than the average market price of our common stock during those
periods.
We issued
approximately 3.3 million shares of our common stock in the second quarter of
2008, 5.0 million in the second quarter of 2007, 7.5 million during the first
half of 2008, and 7.6 million during the first half of 2007 following the
exercise or vesting of the underlying stock options or deferred stock units, or
purchase under our employee stock purchase plan. In addition, in the first
quarter of 2007, we issued approximately five million shares of our common stock
in connection with our acquisition of EndoTex Interventional Systems,
Inc.
On May 6,
2008, our shareholders approved an amendment and restatement of our 2003
Long-Term Incentive Plan (LTIP), increasing the number of shares of our common
stock available for issuance under the plan by 70 million shares.
NOTE
K – STOCK-BASED COMPENSATION
The
following presents the impact of stock-based compensation expense on our
unaudited condensed consolidated statements of operations:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Cost
of products sold
|
|
$ |
6 |
|
|
$ |
4 |
|
|
$ |
12 |
|
|
$ |
8 |
|
Selling,
general and administrative expenses
|
|
|
21 |
|
|
|
21 |
|
|
|
49 |
|
|
|
44 |
|
Research
and development expenses
|
|
|
7 |
|
|
|
7 |
|
|
|
14 |
|
|
|
14 |
|
|
|
|
34 |
|
|
|
32 |
|
|
|
75 |
|
|
|
66 |
|
Less:
income tax benefit
|
|
|
11 |
|
|
|
9 |
|
|
|
23 |
|
|
|
19 |
|
|
|
$ |
23 |
|
|
$ |
23 |
|
|
$ |
52 |
|
|
$ |
47 |
|
NOTE
L – INCOME TAXES
Tax
Rate
The
following table provides a summary of our reported tax rate:
|
|
|
Three
Months Ended
June
30,
|
|
|
|
Percentage
Point
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Increase
(Decrease)
|
|
Reported
tax rate
|
|
|
2.0%
|
|
|
|
8.7%
|
|
|
|
(6.7)%
|
|
Impact
of certain charges*
|
|
|
18.1%
|
|
|
|
12.3%
|
|
|
|
5.8 %
|
|
|
|
|
Six Months
Ended
June
30,
|
|
|
|
Percentage
Point
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Increase
(Decrease)
|
|
Reported
tax rate
|
|
|
|
|
|
|
17.8%
|
|
|
|
7.5
%
|
|
Impact
of certain charges*
|
|
|
|
|
|
|
3.2%
|
|
|
|
(6.5)%
|
|
*These
charges are taxed at different rates than our effective tax
rate.
The
change in our reported tax rates for the second quarter of 2008 and the first
half of 2008, as compared to the same periods in the prior year, related
primarily to the impact of certain charges that are taxed at different rates
than our effective tax rate. In 2008, these charges included purchased research
and development, restructuring-related costs, gains and losses associated with
the divestiture of certain businesses and non-strategic investments, and
discrete items associated with the resolution of uncertain tax
positions. In 2007, these charges included changes to the reserve for
uncertain tax positions relating to items originating in prior periods,
purchased research and development, and charges related to our acquisition of
Guidant. Our effective tax rate for 2008 increased, as compared to
2007, attributable primarily to the expiration of the U.S. Research and
Development (R&D) tax credit at December 31, 2007 and changes in the
geographic mix of our revenues.
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes. At June 30, 2008, we had $1.075 billion of gross
unrecognized tax benefits, $418 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. The net
reduction in our unrecognized tax benefits is attributable primarily to the
resolution of certain unrecognized tax positions in the first half of
2008.
We
recognize interest and penalties related to income taxes as a component of
income tax expense. We recognized income tax-related interest expense of $13
million in the second quarter of 2008 and $11 million in the second quarter of
2007. The total amount of interest and penalties recognized was $11 million in
the first
half of 2008, including a net release in the first quarter, and $32 million in
the first half of 2007. We had $239 million accrued for gross interest and
penalties at June 30, 2008 and $264 million at December 31, 2007.
We are
subject to U.S. federal income tax as well as income tax of multiple state and
foreign jurisdictions. We have concluded all U.S. federal income tax
matters through 2000 and substantially all material state, local, and foreign
income tax matters through 2001. During the first half of 2008, we resolved
certain matters in federal, state and foreign jurisdictions for Guidant and
Boston Scientific for the years 1998 to 2005. We settled multiple federal issues
at the IRS examination and Appellate levels, including issues related to
Guidant’s acquisition of Intermedics, Inc., received favorable foreign court
decisions, and negotiated a state audit settlement. As a result, we decreased
our reserve for uncertain tax positions, net of tax payments, by $90 million,
inclusive of $31 million of interest and penalties, for the first half of
2008.
During
the second quarter of 2008, we received the Revenue Agent’s Report for the
Guidant 2001 to 2003 federal examination, which contained a significant proposed
adjustment related primarily to the allocation of income between our U.S. and
foreign affiliates. We disagree with the proposed adjustment and intend to
contest this matter through applicable IRS and judicial procedures, as
appropriate. Although the final resolution of the proposed adjustments is
uncertain, we believe that our income tax reserves are adequate and
that the resolution of this matter will not have a material impact on our
financial condition or results of operations.
It is
reasonably possible that within the next 12 months we will resolve multiple
issues with federal and state taxing authorities, including transfer pricing,
research and development credit and transaction-related issues, in which case we
could record a reduction in our balance of unrecognized tax benefits of up to
approximately $105 million.
NOTE
M – 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 against us may be asserted 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. 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 financial position,
results of operations or liquidity.
We record
losses for claims in excess of the limits 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 and damages and, under certain
conditions, costs of defense, based on historical experience or to the extent
specific losses are probable and estimable. Otherwise, we expense these costs as
incurred. If the estimate of a probable loss is a range and no amount within the
range is more likely, we accrue the minimum amount of the range.
Our
accrual for legal matters that are probable and estimable was
$1.004 billion at June 30, 2008 and $994 million at December 31,
2007, 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 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.
In
management’s opinion, we are not currently involved in any legal proceedings
other than those specifically identified below or as disclosed in our 2007
Annual Report on Form 10-K, which, individually or in the aggregate, could have
a material effect on our financial condition, operations and/or cash flows.
Unless included in our legal accrual or otherwise indicated below, a range of
loss associated with any individual material legal proceeding can not be
estimated. Except as disclosed below, there have been no material
developments with regards to any matters of litigation or other proceedings
disclosed in our 2007 Annual Report on Form 10-K.
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. 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 9, 2008, the Court of
Appeals denied
our
motion to rehear the appeal and remanded the case to the District Court for
consideration of damages and an outstanding invalidity question. On May 8, 2008
Cordis filed a motion for final judgment with the District Court. On July 8,
2008, we filed a Petition for Certiorari before the United States Supreme
Court.
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 was held on
April 25, 2008 and a decision is expected on September 17, 2008.
On
August 22, 1997, Johnson & Johnson filed a suit for patent
infringement against us alleging that the sale of the NIR® stent infringes
certain Canadian patents owned by Johnson & Johnson. Suit was filed in
the federal court of Canada seeking a declaration of infringement, monetary
damages and injunctive relief. On 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 concluded on
February 29, 2008. On April 30, 2008, the Court found that the NIR stent did not
infringe one patent of Johnson & Johnson and that the other Johnson &
Johnson patent was invalid. On May 30, 2008 Cordis filed an appeal.
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. We intend to appeal the decision. 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. A hearing on prospective relief is
scheduled for October 3, 2008.
On
March 26, 2002, we and our wholly owned subsidiary, Target
Therapeutics, Inc., filed suit for patent infringement against
Cordis alleging that certain detachable coil delivery systems infringe three
U.S. patents, owned by or exclusively licensed to Target. The complaint was
filed in the U.S. District Court for the Northern District of California seeking
monetary and injunctive relief. 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 on March 21, 2008, the Court reinstated the order
finding infringement. Also, on January 18, 2008, the Court granted our motion
for summary judgment that Cordis infringes a second patent in the
suit. Based on this order, we have filed a motion for summary
judgment of infringement of the third patent in the suit, as well as a request
to add infringement of certain additional claims of the second patent. A hearing
on this motion was held on May 9, 2008. On January 25, 2008, the Court also
ruled that two of the patents, including one on which summary judgment of
infringement had been granted, are not invalid based on prior public or
commercial use. On March 21, 2008, the Court granted in part and denied in part
our motion for summary judgment of no inequitable conduct.
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 hearing to consider new evidence was held on May 29, 2008. We
expect a decision on September 12, 2008. In December 2005, the
Johnson & Johnson subsidiaries filed a nullity action in France. On
January 25, 2008, we filed a counterclaim infringement action in France, and a
hearing is scheduled for April 6, 2009. 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. On August 5, 2008, the District Court of
Dusseldorf stayed the proceedings in the German infringement action pending a
decision from the District Court of Brussels.
On
November 29, 2007, Boston Scientific Scimed filed suit against a German
subsidiary of Johnson & Johnson alleging the Cypher and Cypher Select
drug-eluting stents infringe one of our European patents. The suit was filed in
Mannheim, Germany seeking monetary and injunctive relief. A hearing has been
scheduled for August 8, 2008.
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 each
of May 25, June 1, June 22 and November 27, 2007, Boston Scientific Scimed and
we filed suit against Johnson & Johnson and Cordis in the U.S. District
Court for the District of Delaware seeking a declaratory judgment of invalidity
of a specific U.S. patent owned by them and of non-infringement of the patent by
our PROMUS™ coronary stent system. On February 21, 2008, Cordis answered the
complaints, denying the allegations, and filed counterclaims for infringement
seeking an injunction and a declaratory judgment of validity. Trials on all
four suits are scheduled to begin on 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.
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 were
not formally served with the complaint and the lawsuit was dismissed without
prejudice on June 20, 2008. On February 1, 2008, Wyeth and
Cordis
Corporation filed an amended complaint against Abbott Laboratories, adding us
and Boston Scientific Scimed as additional defendants to the complaint. The suit
alleges that our PROMUS coronary stent system, upon launch in the United States,
will infringe the same three U.S. patents owned by Wyeth and licensed to
Cordis. The suit was filed in the United States District Court for the
District of New Jersey seeking monetary and injunctive relief. On March 17,
2008, we filed a motion to dismiss for lack of subject matter jurisdiction, and
on May 8, 2008, that motion was denied. On May 23, 2008, we answered denying
allegations of the complaint and asserting a counterclaim of invalidity. A trial
has not yet been scheduled.
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. A trial was held in May 2008. On May 27, 2008,
the Court found one of the patents not infringed. On the same date, the jury
found the other three patents valid and infringed, awarding Medtronic $250
million in damages. On July 11, 2008, the Court granted our motion that certain
accused products did not infringe one of the patents and ordered the parties to
submit a new damage calculation. On July 21, 2008, Medtronic and we agreed that
the Court’s ruling reduced the damages by approximately $64 million. On July 16,
2008, Medtronic moved for reconsideration of the Court’s ruling. The Court heard
evidence on certain of our legal and equitable defenses on July 31, 2008. At the
hearing, the Court denied Medtronic’s motion for reconsideration.
On July
25, 2007, the U.S. District Court for the Northern District of California
granted our motion to intervene in an action filed February 15, 2006 by
Medtronic Vascular and certain of its affiliates against Advanced Cardiovascular
Systems, Inc. and Abbott Laboratories. As a counterclaim plaintiff in this
litigation, we are seeking a declaratory judgment of patent invalidity and of
non-infringement by our PROMUS coronary stent system relating to two U.S.
patents owned by Medtronic. On July 30, 2008, Medtronic moved to amend its
complaint to add us as a defendant and to allege infringement by the sale of
PROMUS stent systems in the United States. A hearing on the motion is scheduled
for September 3, 2008. On July
30, 2008, we filed a motion for summary judgment and on July 31, 2008, Medtronic
filed a motion for summary judgment. Both motions are scheduled to be heard on
September 24, 2008. Trial is scheduled to begin on January 29,
2009.
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 we 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. The arbitration hearing was held on September 17
through September 21, 2007. On May 2, 2008, the World Intellectual Property
Organization panel held that the Medinol patents were valid but not infringed by
our Liberté and TAXUS Liberté stent systems. On June 6, 2008, the parties agreed
not to appeal the decision.
On
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. We expect a decision on our appeal during the fourth
quarter of 2008.
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. On June 29,
2008, the parties agreed that we can sell PROMUS stent systems in the United
States supplied to us by Abbott. A hearing on the European and German patents is
scheduled to begin May 11, 2009.
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 State District
Court in 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 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 Appellate 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. On May 16, 2008, the company answered denying the
allegations in the complaint.
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. On March 27, 2008,
the parties signed a definitive settlement agreement and the case has been
formally dismissed.
On
December 16, 2003, The Regents of the University of
California filed suit against Micro Therapeutics, Inc., a subsidiary
of ev3, and Dendron GmbH alleging that Micro Therapeutics’ Sapphire detachable
coil delivery systems infringe twelve patents licensed to us and owned by The
Regents. The complaint was filed in the U.S. District Court for the Northern
District of California seeking monetary and injunctive relief. On
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. On March 27, 2008, the parties signed a definitive
settlement agreement and on April 4, 2008, a Stipulation of Dismissal was filed
with the Court and the case was formally dismissed.
On
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. On March 27, 2008, the parties
signed a definitive settlement agreement and the case has been formally
dismissed.
On
September 27, 2004, Target Therapeutics and we filed suit for patent
infringement against Micrus Corporation alleging that certain detachable embolic
coil devices infringe two U.S. patents exclusively licensed to Target
Therapeutics. The complaint was filed in the U.S. District Court for the
Northern District of California seeking monetary and injunctive relief. On
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 March 21,
2008, the Court rendered its claim construction ruling regarding the various
patents at issue. On June 19, 2008, the Court granted in part and denied in
part our motion to dismiss, and dismissed with leave to amend Micrus’s claims
for disparagement and intentional interference with economic advantages. On August
6, 2008, we reached an agreement in principle with Micrus to resolve this
matter. The parties are currently negotiating a definitive settlement
agreement.
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 was held on March 13, 2008, and a decision is expected during the
third quarter of 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. Oral
arguments were heard on April 8, 2008 and on July 11, 2008, the Court of Appeals
vacated the District Court’s consent judgment and remanded the case back to the
District Court for further clarification.
On 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 on April 1, 2008, the Court appointed a technical
expert.
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. On July 9, 2008, the Court denied our post trial motions to reverse the
jury verdict. On August 5, 2008, we filed an appeal with the U.S. Court of
Appeals for the Federal Circuit in Washington, D.C. 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. We answered the
original complaint denying the allegations. On February 18, 2008, Wall
Cardiovascular Technologies filed a request, which has been granted by the
Court, to amend its complaint to add Medtronic, Inc. to the suit with respect to
Medtronic’s drug-eluting stent system. A Markman hearing has been scheduled for
November 3, 2010. Trial is scheduled to begin on April 4, 2011.
On August
6, 2008, Boston Scientific Scimed and we filed suit against Wall Cardiovascular
Technologies, in the U.S. District Court for the District of Delaware
seeking a declaratory judgment of invalidity and unenforceability due to
inequitable conduct and prosecution history laches of a U.S. patent owned by
them, and of non-infringement of the patent by our PROMUS coronary stent
system.
On July
2, 2008, Cardio Access LLC filed suit against us alleging infringement of a
patent related to an intra-aortic balloon access cannula owned by them. The suit
was filed in the U.S. District Court for the Eastern District of Texas seeking
monetary and injunctive relief. Our answer to the complaint is due on August 21,
2008. We intend to deny the allegations.
On
October 15, 2007, CryoCath Technologies, Inc. filed suit for patent infringement
against CryoCor, Inc. (acquired by Boston Scientific Scimed on May 28, 2008)
alleging that cryoconsoles and cryoablation catheters sold by CryoCor infringe
certain of CryoCath’s patents. The suit was filed in the U.S. District Court for
the District of Delaware and seeks monetary damages and injunctive relief. On
December 5, 2007 CryoCor answered the complaint, denying allegations of
infringement and filing a counterclaim requesting a declaratory judgment that
the patents are not infringed, are invalid, and are unenforceable. A trial date
has not yet been scheduled. Two of the patents asserted by CryoCath are also
involved in interference proceedings provoked by CryoCor. The interferences are
ongoing at the U.S. Patent and Trademark Office.
On
January 15, 2008, CryoCor and AMS Research Corporation (“AMS”) filed a statement
of claim in Canada alleging that CryoCath’s cryoablation catheters and
cryoconsole infringe certain Canadian patents licensed by CryoCor. The suit
seeks injunctive relief and monetary damages. CryoCath answered on April 23,
2008, denying all allegations and raising other defenses. A trial is scheduled
to begin in August 2009.
On
January 15, 2008, CryoCor and AMS filed a suit for patent infringement against
CryoCath alleging that Cryocath’s cryosurgical products, including its
cryoconsole and cryoablation catheters, infringe three patents exclusively
licensed to CryoCor. The suit was filed in the U.S. District Court for the
District of Delaware, and seeks monetary damages and injunctive relief. On
February 4, 2008, CryoCath answered the complaint, denying the allegations and
counterclaiming for a declaratory judgment that the patents are invalid and
non-infringed, as well as alleging antitrust violations, deceptive and unfair
business practices and patent
infringement
by CryoCor of a CryoCath patent. On May 19, 2008, the parties stipulated to a
stay of the action pending resolution of a related proceeding in the
International Trade Commission.
On
February 28, 2008, CryoCor and AMS brought a complaint in the International
Trade Commission alleging that Cryocath’s cyrosurgical products, including its
cryoconsole and cryoablation catheters, infringe three patents exclusively
licensed to CryoCor. CryoCor and AMS are seeking an order to exclude entry into
the United States of any of CryoCath’s products found to infringe the patents.
CryoCath filed an answer on April 29, 2008, denying all allegations in the
complaint. A trial is scheduled to begin on January 26, 2009.
On August
7, 2008, Thermal Scalpel LLC filed suit against us and numerous other medical
device companies alleging infringement of a patent related to an electrically
heated surgical cutting instrument exclusively licensed to them. The suit was
filed in the U.S. District Court for the Eastern District of Texas seeking
monetary and other further relief.
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 July 31, 2008, the Board of Directors rejected the demand
in the first letter to commence action against the defendants.
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. The Mississippi Public Employee Retirement System Group appealed the
Court’s decision. On April 16, 2008, the First Circuit reversed the dismissal of
only plaintiff’s TAXUS stent recall related claims and remanded the matter for
further proceedings. A trial has not yet been scheduled.
On
January 19, 2006, George Larson filed a purported class action complaint in
the U.S. District Court for the District of Massachusetts on behalf of
participants and beneficiaries of our 401(k) Retirement Savings Plan (401(k)
Plan) and GESOP alleging that we and certain of our officers and employees
violated certain provisions under the Employee Retirement Income Security Act of
1974, as amended (ERISA) and
Department
of Labor Regulations. Similar actions were filed on January 26,
February 8, February 14, February 23 and March 3, 2006. On April
3, 2006, the Court issued an order consolidating the actions. On August 23,
2006, plaintiffs filed a consolidated purported class action complaint on behalf
of all participants and beneficiaries of our 401(k) Plan during the period May
7, 2004 through January 26, 2006 alleging that we, our 401(k) Administrative and
Investment Committee (the Committee), members of the Committee, and certain
directors violated certain provisions of ERISA. The complaint alleges, among
other things, that the defendants breached their fiduciary duties to the 401(k)
Plan’s participants because they knew or should have known that the value of the
Company’s stock was artificially inflated and was not a prudent investment for
the 401(k) Plan. The 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. On March 7, 2008, plaintiffs filed a motion for class
certification. Defendants filed their opposition to plaintiffs’ class
certification motion on May 28, 2008, and plaintiffs’ reply is due August 8,
2008. On June 30, 2008, Robert Hochstadt (who previously had withdrawn as an
interim lead plaintiff) filed a motion to intervene to serve as a proposed class
representative. Defendants filed their opposition to Hochstadt’s intervention
motion on July 14, 2008. 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. In
connection with the plea agreement, EVT entered into a five year Corporate
Integrity Agreement (“CIA”) with the Office of the Inspector General of the
United States Department of Health and Human Services. On June 30, 2008, the CIA
expired in accordance with its terms. A final annual report is due August 30,
2008.
At the
time of the EVT plea agreement, 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 11 suits outstanding, and more suits may be
filed. The complaints seek damages, including punitive damages. The complaints
are in various stages of discovery. Additionally, Guidant has been notified of
over 130 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. The Indiana appeal was heard on
March 25, 2008, and on April 17, 2008, the Court of Appeals reversed the partial
summary judgment ruling finding instead that Allianz did not have a duty to
defend. Guidant will seek review from the Indiana Supreme Court. 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 were pending in the Southern
District of Indiana and in the Superior Court of the State of Indiana, County of
Marion. The suits, purportedly filed on behalf of Guidant, initially alleged
that Guidant’s directors breached their fiduciary duties by taking improper
steps or failing to take steps to prevent the ANCURE and EVT related matters
described above. The complaints sought damages and other equitable relief. The
state court derivative suits were 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. On May 1, 2006, the defendants moved to dismiss the federal
derivative case. On March 27, 2008, the District Court granted the motion to
dismiss and entered judgment in favor of all defendants. The time period in
which plaintiffs may appeal has expired. On July 11, 2008, the Superior Court
granted the parties’ joint motion to lift the stay of proceedings and dismiss
the complaint with prejudice in the final pending state derivative
action.
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. In June 2008, the District
Court dismissed the complaint in part, but ruled that certain of the plaintiffs’
claims may go forward to discovery.
Approximately
76 product liability class action lawsuits and more than 2,277 individual
lawsuits involving approximately 5,550 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 more than fifteen (15) Guidant product liability lawsuits pending
internationally associated with defibrillators or pacemakers involved in the
2005 and 2006 product communications. Six of those suits pending in Canada are
putative class actions. A hearing on whether the first of these putative
class actions should be certified as a class was held in mid-January 2008 and on
April 10, 2008, the Court certified a class of all persons in whom
defibrillators were implanted in Canada and a class of family members with
derivative claims. Guidant has moved for leave to appeal the Court’s
class-certification decision, and a hearing will be held on Guidant’s
motion on August 15, 2008. The second of these putative class actions
encompasses all persons in whom pacemakers were implanted in Canada and involves
claims similar to the defibrillator class action. A hearing on whether the
pacemaker putative class action should be class certified is set for
mid-November 2008.
Between
March and July 2005, sixty-nine former employees filed charges against Guidant
with the U.S. Equal Employment Opportunity Commission (EEOC) alleging that
Guidant discriminated against the former employees on the basis of their age
when Guidant terminated their employment in the fall of 2004 as part of a
reduction in force. In September 2006, the EEOC found probable cause to support
the allegations in the charges pending before it. On March 24, 2008, the EEOC
began dismissing the charges, with the final charges dismissed on April 4, 2008,
in light of the litigation pending in Minnesota District Court described in the
following paragraph.
In April
2006, sixty-one former employees sued Guidant in the U.S. District Court for the
District of Minnesota, 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. In August 2007, counsel for the plaintiffs voluntarily dismissed two of
their clients from the case, leaving a total of fifty-nine individual
plaintiffs, and 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. Two of these additional
plaintiffs have since dismissed their claims from the lawsuit. As a result, the
class currently consists of 104 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.
On
November 3, 2005, a securities class action complaint was filed on behalf
of purchasers of Guidant stock between December 1, 2004 and October 18, 2005 in
the U.S. District Court for the Southern District of Indiana, against Guidant
and several of its officers and directors. The complaint alleges that the
defendants concealed adverse information about Guidant’s defibrillators and
pacemakers and sold stock in violation of federal securities laws. The complaint
seeks a declaration that the lawsuit can be maintained as a class action,
monetary damages, and injunctive relief. Several additional, related securities
class actions were filed in November 2005 and January 2006. The Court issued an
order consolidating the complaints and appointed the Iron Workers of Western
Pennsylvania Pension Plan and David Fannon as lead plaintiffs. Lead plaintiffs
filed a consolidated amended complaint. In August 2006, the defendants moved to
dismiss the complaint. On February 27, 2008, the District Court granted the
motion to dismiss and entered final judgment in favor of all defendants. On
March 13, 2008, the plaintiffs filed a motion seeking to amend the final
judgment to permit the filing of a further amended complaint. On March 28, 2008,
defendants opposed the motion. On May 21, 2008, the District Court denied
plaintiffs motion to amend the judgment. On June 6, 2008, plaintiffs appealed
the judgment to the United States Court of Appeals for the Seventh
Circuit.
On July
1, 2008, Guidant Sales Corporation received a subpoena from the Maryland office
of the Department of Health and Human Services, Office of Inspector General.
This subpoena seeks information concerning payments to physicians, primarily
related to the training of sales representatives. We are cooperating with this
request.
On 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.
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. On February 26, 2008, Guidant France joined the
appellate proceedings. Written arguments are due to the appellate court by the
end of December 2008.
In
December 2007, we were informed by the Department of Justice that it is
conducting an investigation of allegations that we and other suppliers
improperly promoted biliary stents for off-label uses. On June 26, 2008,
the Department of Justice issued a subpoena to us under the Health Insurance
Portability & Accountability Act of 1996 requiring the production of
documents to the United States Attorney’s Office in the District of
Massachusetts. We are cooperating with the investigation.
On
February 26, 2008, fifteen pharmaceutical and medical device manufacturers,
including Boston Scientific, received a letter from Senator Charles E. Grassley,
ranking member of the United States Senate Committee on Finance regarding their
plans to enhance the transparency of financial relationships with physicians and
medical organizations. On March 7, 2008, we responded to the
Senator.
On June
27, 2008, the Republic of Iraq filed a complaint against us and ninety-two other
defendants in the U.S. District Court of the Southern District of New York. The
complaint alleges that the defendants acted improperly in connection with the
sale of products under the United Nations Oil for Food Program. The complaint
alleges RICO violations, conspiracy to commit fraud and the making of false
statements and improper payments, and seeks monetary and punitive damages. We
have not yet been served with the complaint, but intend to vigorously defend
against its allegations.
On May 8,
2008, certain shareholders of CryoCor, Inc. filed a lawsuit in the Superior
Court of the State of California, County of San Diego, against CryoCor, its
directors and us. The lawsuit alleges that the directors of CryoCor breached
their fiduciary duties to their shareholders by approving the sale of the
company to us and that we aided and abetted in the breach of fiduciary
duties.
On July
14, 2008, we received a subpoena from the State of New Hampshire, Office of the
Attorney General, requesting information in connection with the sales by us of
medical devices or equipment intended to be used in the administration of spinal
cord stimulation trials to practitioners other than practicing medical doctors.
We are cooperating with the request.
FDA
Warning Letters
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. Beginning in
February 2008, the FDA reinspected a number of our facilities. We are in regular
communication with the FDA regarding the resolution of the corporate warning
letter.
In August
2007, we received a warning letter from the FDA regarding the conduct of
clinical investigations associated with our abdominal aortic aneurysm (AAA)
stent-graft program acquired from TriVascular, Inc. We implemented a
comprehensive plan of corrective actions regarding the conduct of our clinical
trials and informed the FDA that we have finalized commitments made as part of
our response. We terminated the TriVascular AAA development program in 2006. We
do not believe this warning letter will have an impact on the timing of the
resolution of our corporate warning letter.
NOTE
N – SEGMENT REPORTING
In the
first quarter of 2008, we reorganized our international structure in order to
allow for better utilization of infrastructure and resources. Accordingly, we
have revised our reportable segments to reflect the way we currently manage and
view our business. We now have three reportable segments based on geographic
regions: the United States; EMEA, consisting of Europe, the Middle East and
Africa; and Inter-Continental. We combined our Middle East and Africa
operations, previously included in our Inter-Continental segment, with Europe to
form a new EMEA region and merged our former Asia Pacific region into our
Inter-Continental segment. 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
certain corporate and manufacturing-related expenses, as our corporate and
manufacturing functions do not meet the definition of a segment, as defined by
FASB Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information. In addition, certain transactions or
adjustments that our Chief Operating Decision Maker considers to be
non-recurring and/or non-operational, such as amounts related to acquisitions,
divestitures, litigation and restructuring activities, 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 and are included in the reconciliation below.
We manage
our international operating segments on a constant currency basis. Sales
generated from reportable segments and divested businesses, as well as operating
results of reportable segments and expenses from manufacturing operations, are
based on internally derived standard currency exchange rates, which may differ
from year to year and do not include intersegment profits. We have restated the
segment information for 2007 net sales and operating results based on our
standard currency exchange rates used for 2008 in order to remove the impact of
currency fluctuations. In addition, we have reclassified previously reported
2007 segment results to be consistent with the 2008 presentation. Because of the
interdependence of the reportable segments, the operating profit as presented
may not be representative of the geographic distribution that would occur if the
segments were not interdependent. A reconciliation of the totals reported for
the reportable segments to the applicable line items in our unaudited condensed
consolidated statements of operations is as follows:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
1,088 |
|
|
$ |
1,118 |
|
|
$ |
2,205 |
|
|
$ |
2,287 |
|
EMEA
|
|
|
464 |
|
|
|
452 |
|
|
|
922 |
|
|
|
926 |
|
Inter-Continental
|
|
|
364 |
|
|
|
376 |
|
|
|
731 |
|
|
|
708 |
|
Net
sales allocated to reportable segments
|
|
|
1,916 |
|
|
|
1,946 |
|
|
|
3,858 |
|
|
|
3,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
generated from divested businesses
|
|
|
18 |
|
|
|
140 |
|
|
|
49 |
|
|
|
276 |
|
Currency
exchange
|
|
|
90 |
|
|
|
(15 |
) |
|
|
164 |
|
|
|
(40 |
) |
|
|
$ |
2,024 |
|
|
$ |
2,071 |
|
|
$ |
4,071 |
|
|
$ |
4,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
253 |
|
|
$ |
307 |
|
|
$ |
533 |
|
|
$ |
625 |
|
EMEA
|
|
|
220 |
|
|
|
226 |
|
|
|
437 |
|
|
|
487 |
|
Inter-Continental
|
|
|
189 |
|
|
|
198 |
|
|
|
392 |
|
|
|
364 |
|
Operating
income allocated to reportable segments
|
|
|
662 |
|
|
|
731 |
|
|
|
1,362 |
|
|
|
1,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
operations
|
|
|
(89 |
) |
|
|
(154 |
) |
|
|
(190 |
) |
|
|
(308 |
) |
Corporate
expenses and currency exchange
|
|
|
(98 |
) |
|
|
(135 |
) |
|
|
(166 |
) |
|
|
(272 |
) |
Acquisition-,
divestiture-, and restructuring-related (charges) credits
|
|
|
(37 |
) |
|
|
(4 |
) |
|
|
156 |
|
|
|
(21 |
) |
Amortization
expense
|
|
|
(135 |
) |
|
|
(158 |
) |
|
|
(279 |
) |
|
|
(312 |
) |
Operating
income
|
|
|
303 |
|
|
|
280 |
|
|
|
883 |
|
|
|
563 |
|
Other
expense
|
|
|
(203 |
) |
|
|
(154 |
) |
|
|
(321 |
) |
|
|
(277 |
) |
|
|
$ |
100 |
|
|
$ |
126 |
|
|
$ |
562 |
|
|
$ |
286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
O – NEW ACCOUNTING PRONOUNCEMENTS
Statement
No. 141(R)
In
December 2007, the FASB issued Statement No. 141(R), Business Combinations, a
replacement for Statement No. 141. Statement No. 141(R) retains the fundamental
requirements of Statement No. 141, but requires the recognition of all assets
acquired and liabilities assumed in a business combination at their fair values
as of the acquisition date. It also requires the recognition of assets acquired
and liabilities assumed arising from contractual contingencies at their
acquisition date fair values. Additionally, Statement No. 141(R) supersedes FASB
Interpretation No. 4, Applicability of FASB Statement No.
2 to Business Combinations Accounted for by the Purchase Method, which
required research and development assets acquired in a business combination that
had no alternative future use to be measured at their fair values and expensed
at the acquisition date. Statement No. 141(R) now requires that purchased
research and development be recognized as an intangible asset. We are required
to adopt Statement No. 141(R) prospectively for any acquisitions on or after
January 1, 2009 and are currently evaluating the impact that Statement No.
141(R) will have on our consolidated financial statements.
Statement
No. 161
In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities, which amends Statement No. 133 by
requiring expanded disclosures about an entity’s derivative instruments and
hedging activities. Statement No. 161 requires increased qualitative,
quantitative, and credit-risk disclosures, including (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under Statement No. 133 and its related interpretations,
and (c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. We are
required to adopt Statement No. 161 for our first quarter ending March 31,
2009.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Introduction
Boston
Scientific Corporation is a worldwide developer, manufacturer and marketer of
medical devices that are used in a broad range of interventional medical
specialties. Our mission is to 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.
Financial
Summary
Three
Months Ended June 30, 2008
Our net
sales for the second quarter of 2008 were $2.024 billion, as compared to $2.071
billion for the second quarter of 2007, a decrease of $47 million or two
percent. See Quarterly Results
section below for a discussion of our net sales for the quarter. Our
reported net income for the second quarter of 2008 was $98 million, or $0.07 per
diluted share, as compared to net income of $115 million, or $0.08 per diluted
share, for the second quarter of 2007. Our
reported results for the second quarter of 2008 included acquisition-,
divestiture-, and restructuring-related charges (after-tax) of $98 million, or
$0.06 per share, consisting of: losses of $64 million associated with the
divestiture of certain non-strategic investments, $15 million of
restructuring-related costs, and charges of $19 million for purchased research
and development associated with our acquisition of CryoCor, Inc. Our reported
results for the second quarter of 2007 did not include any significant
acquisition-, divestiture- or restructuring-related charges.
Six
Months Ended June 30, 2008
Our net
sales for the first half of 2008 were $4.071 billion, as compared to $4.157
billion for the first half of 2007, a decrease of $86 million or two percent.
See Quarterly Results
section below for a discussion of our net sales for the first half of
2008. Our reported net income for the first half of 2008 was $420 million, or
$0.28 per diluted share, as compared to net income of $235 million, or $0.16 per
diluted share, for the first half of 2007. Our
reported results for the first half of 2008 included acquisition, divestiture-,
and restructuring-related net charges (after-tax) of $23 million, or $0.01 per
share, consisting of: a $51 million net credit associated with gains on the
divestiture of certain of our non-strategic businesses and investments, $47
million of restructuring-related costs, and charges of $27 million for purchased
research and development. Our reported results for the first half of 2007
included acquisition-related charges (after-tax) of $22 million, or $0.01 per
share, consisting primarily of integration costs related to our 2006 acquisition
of Guidant Corporation and an adjustment representing a decrease in fair value
of the sharing of proceeds feature of the Abbott Laboratories stock purchase
discussed in further detail in our 2007 Annual Report on Form 10-K.
Business
and Market Overview
Coronary
Stent Business
Coronary
stent revenue represented approximately 22 percent of our consolidated net sales
during the second quarter of 2008, as compared to 24 percent in the second
quarter of 2007. We estimate that the worldwide coronary stent market will
approximate $4.8 billion in 2008, as compared to approximately $5.0 billion
in 2007, and estimate that drug-eluting stents will represent approximately
80 percent of the dollar value of worldwide coronary stent market sales in
2008, as they did in 2007. 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 safety
and efficacy of drug-eluting stents, as well as the increased perceived risk of
late stent thrombosis1 following the use of drug-eluting stents, has
contributed to a decline in the worldwide drug-eluting stent market size as
compared to prior years. However, data addressing the risk of late stent
thrombosis and supporting the safety of drug-eluting stent systems appear to
have had a stabilizing effect on the size of the drug-eluting stent market, as
cardiologists regain confidence in this technology. The second quarter of 2008
represented the second consecutive quarter of increasing penetration rates in
the U.S., estimated to be 66 percent, as compared to 63 percent for the first
quarter of 2008 and 62 percent for the fourth quarter of 2007. We believe that
these increases, along with an increase in PCI procedural volume, indicate that
the health of the U.S. drug-eluting stent market is improving.
(in
millions)
|
|
Three
Months Ended
June
30, 2008
|
|
|
Three
Months Ended
June
30, 2007
|
|
|
|
U.S.
|
|
|
International
|
|
|
Total
|
|
|
U.S.
|
|
|
International
|
|
|
Total
|
|
Drug-eluting
|
|
$ |
175 |
|
|
$ |
207 |
|
|
$ |
382 |
|
|
$ |
249 |
|
|
$ |
188 |
|
|
$ |
437 |
|
Bare-metal
|
|
|
25 |
|
|
|
33 |
|
|
|
58 |
|
|
|
26 |
|
|
|
35 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
200 |
|
|
$ |
240 |
|
|
$ |
440 |
|
|
$ |
275 |
|
|
$ |
223 |
|
|
$ |
498 |
|
During
the second quarter of 2008, U.S. sales of our drug-eluting stent systems
declined $74 million, or 30 percent, to $175 million from $249 million during
the second quarter of 2007, due primarily to declines in our share of the market
as a result of a recent competitive launch. We believe that our share of the
U.S. drug-eluting stent market was 45 percent for the second quarter of 2008,
excluding a $22 million reduction in sales as a result of the establishment of
sales returns reserves in anticipation of the launch of our TAXUS® Liberté®
coronary stent system, as compared to 54 percent for the second quarter of 2007.
Until recently, our TAXUS paclitaxel-eluting coronary stent system was one of
only two drug-eluting stent products available in the U.S. market. However, late
in the first quarter of 2008, Medtronic launched its Endeavor®
zotarolimus-eluting coronary stent system and, in July 2008, Abbott Laboratories
launched its XIENCE™ V
everolimus-eluting coronary stent system, putting increased pressure on our U.S.
drug-eluting stent system sales. We expect that our share of the U.S.
drug-eluting stent market, as well as unit prices, will continue to be impacted
as the market acclimates to new competitive product offerings. Simultaneous with
Abbott’s U.S. launch of XIENCE V, we launched our PROMUS™ everolimus-eluting
coronary stent system, an identical, private-labeled XIENCE V stent system
supplied to us by Abbott. We believe that being the only company to offer two
distinct drug-eluting stent platforms provides us a considerable advantage in
the U.S. drug-eluting stent market and will enable us to achieve a sustainable
leadership position in this market.
Under the
terms of our supply arrangement with Abbott, the gross profit margin of a PROMUS
stent system is significantly lower than that of our TAXUS stent system.
Therefore, an increase in PROMUS stent system
__________________
1
|
Late stent thrombosis is the
formation of a clot, or thrombus, within the stented area one year or more
after implantation of the
stent.
|
revenue
at the expense of our TAXUS stent system revenue will have a negative impact on
our gross profit margins. In addition, we are reliant on Abbott for our supply
of PROMUS stent systems. Any production or capacity issues that affect Abbott’s
manufacturing capabilities or the process for forecasting, ordering and
receiving shipments may impact our ability to increase or decrease the level of
supply to us in a timely manner; therefore, our PROMUS stent system supply may
not align with customer demand. We are incurring incremental costs
and expending incremental resources in order to develop and commercialize
additional products utilizing everolimus-eluting stent technology and to support
an internally developed and manufactured everolimus-eluting stent system in the
future. We expect that this stent system will have gross profit margins more
comparable to our TAXUS stent system.
During
the second quarter of 2008, our international drug-eluting stent system net
sales increased $19 million, or ten percent, as compared to the second quarter
of 2007. The increase was driven largely by the favorable impact of foreign
currency exchange rates, in addition to sales of our TAXUS® Express2Ô
drug-eluting coronary stent system in Japan, following its launch in May 2007.
These increases were partially offset by decreases in our share of the
drug-eluting stent market in our Europe/Middle East/Africa (EMEA) region.
However, we believe
that international PCI procedural volume increased as compared to the
second quarter of 2007 and international penetration rates grew as compared to
the first quarter of 2008.
Historically,
the worldwide coronary stent market has been dynamic and highly competitive with
significant market share volatility. In addition, in the ordinary course of our
business, we conduct and participate in numerous clinical trials with a variety
of study designs, patient populations and trial end points. Unfavorable or
inconsistent clinical data from existing or future clinical trials conducted by
us, by our competitors or by third parties, or the market’s perception of these
clinical data, may adversely impact our position in, and share of the
drug-eluting stent market and may contribute to increased volatility in the
market. In addition, the FDA has informed stent manufacturers of new
requirements for clinical trial data for pre-market approval (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 achieve a sustainable leadership position within the
worldwide drug-eluting stent market for a variety of reasons,
including:
·
|
our
two drug-eluting stent platform strategy, including our TAXUS®
paclitaxel-eluting and PROMUS™ everolimus-eluting coronary stent
systems;
|
·
|
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;
|
·
|
our
overall position in the worldwide interventional medicine market and our
experienced interventional cardiology sales force;
and
|
·
|
the
strength of our clinical, marketing and manufacturing
capabilities.
|
However,
a further decline in 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:
·
|
the
entry of additional competitors into the market, including the recent
approval of two competitive products in the
U.S.;
|
·
|
our
ability to launch next-generation products and technology features,
including our TAXUS® Liberté® paclitaxel-eluting
stent system, in the U.S. market;
|
·
|
our
ability to successfully launch our PROMUS™
everolimus-eluting coronary stent system in the U.S.
market;
|
·
|
physician
and patient confidence in our technology and attitudes toward drug-eluting
stents, including the continued abatement of prior concerns regarding the
risk of late stent thrombosis;
|
·
|
changes
in drug-eluting stent penetration rates, the overall number of PCI
procedures performed, average number of stents used per procedure, and
average selling prices of drug-eluting stent
systems;
|
·
|
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 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.
|
Cardiac
Rhythm Management Products
Cardiac
rhythm management (CRM) product revenue represented approximately 29 percent of
our consolidated net sales for the second quarter of 2008, as compared to
approximately 25 percent for the second quarter of 2007. We estimate that the
worldwide CRM market will approximate $10.8 billion in 2008, as compared to
approximately $10.1 billion in 2007, and estimate that U.S. implantable
cardioverter defibrillator (ICD) system sales will represent approximately 40
percent of the worldwide CRM market in 2008, as they did in 2007.
The
following are the components of our worldwide CRM sales:
(in
millions)
|
|
Three
Months Ended
June
30, 2008
|
|
|
Three
Months Ended
June
30, 2007
|
|
|
|
U.S.
|
|
|
International
|
|
|
Total
|
|
|
U.S.
|
|
|
International
|
|
|
Total
|
|
ICD
systems
|
|
$ |
276 |
|
|
$ |
144 |
|
|
$ |
420 |
|
|
$ |
253 |
|
|
$ |
124 |
|
|
$ |
377 |
|
Pacemaker
systems
|
|
|
88 |
|
|
|
70 |
|
|
|
158 |
|
|
|
79 |
|
|
|
68 |
|
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
364 |
|
|
$ |
214 |
|
|
$ |
578 |
|
|
$ |
332 |
|
|
$ |
192 |
|
|
$ |
524 |
|
Our U.S.
sales of ICD systems for the second quarter of 2008 increased $23 million, or
nine percent, as compared to the second quarter of 2007. In
addition, U.S. sales of our pacemaker systems for the second quarter
of 2008 increased $9 million, or 11 percent, as compared to the second quarter
of 2007. Our U.S. sales benefited from the launch of new products
during the first half of 2008, including the CONFIENT™ ICD system, the LIVIAN™
cardiac resynchronization therapy defibrillator (CRT-D) system, and the ALTRUA™
family of pacemaker systems. International ICD system sales increased
$20 million, or 16 percent, in the
second
quarter of 2008, as compared to the second quarter of 2007, due primarily to the
favorable impact of currency exchange rates. However, our net sales
and market share in Japan have been negatively impacted as we move to a direct
sales model in Japan and, until we fully implement this model, our net sales and
market share in Japan may continue to be negatively impacted.
Worldwide
CRM market growth rates over the past two years, including the U.S. ICD market,
have been below those experienced in prior years, resulting primarily from
previous industry field actions and from a lack of new indications for use.
While we have begun to see modest signs of improvement and expect that growth
rates in the worldwide CRM market will improve over time, there can be no
assurance that the market will return to its 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 increase 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;
|
·
|
our
ability to successfully launch next-generation products and technology in
the U.S. market, including our next-generation COGNIS™ CRT-D and
TELIGEN™ ICD systems
as well as the ALTRUA™ family of
pacemaker systems;
|
·
|
the
successful conclusion and positive outcomes of on-going clinical trials
that may provide opportunities to expand indications for
use;
|
·
|
variations
in clinical results, reliability or product performance of our and our
competitors’ products;
|
·
|
delayed
or limited regulatory approvals and unfavorable reimbursement
policies;
|
·
|
our
ability to retain key members of our sales force and other key
personnel;
|
·
|
new
competitive launches;
|
·
|
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. Following the resolution of the warning letter, we received
numerous FDA approvals and have since launched several CRM products. In August
2008, we launched our next-generation COGNIS CRT-D and TELIGEN ICD systems in
the U.S. We received CE Mark approval for these systems in the first quarter of
2008 and initiated an international launch in June 2008. In addition, during the
quarter we launched our ACUITY® Spiral left ventricular lead for use with CRT-Ds
and cardiac resynchronization therapy pacemakers (CRT-P) in the U.S., as well as
the ALTRUA family of pacemaker systems. We believe that these launches position
us for growth within the worldwide CRM market.
Regulatory
Compliance
In
January 2006, legacy Boston Scientific received a corporate warning letter from
the FDA notifying us of serious regulatory problems at three of our
facilities and advising us that our corporate-wide corrective action plan
relating to three site-specific warning letters issued to us in 2005 was
inadequate. We believe we have
identified
solutions to the quality system issues cited by the FDA and have made
significant progress in transitioning our organization to implement those
solutions. We 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,
beginning in February 2008, the FDA reinspected a number of our facilities. We
are in regular communication with the FDA regarding the resolution of the
corporate warning letter.
There can
be no assurances regarding the length of time or cost it will take us to resolve
our quality issues to our satisfaction and to the satisfaction of the FDA.
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. Our inability to resolve these quality issues in a
timely manner may further delay product launch schedules, including the
anticipated U.S. launch of our next-generation TAXUS® Liberté® drug-eluting
stent system, which may weaken our competitive position in the market. We have
received an approvable letter for our TAXUS Liberté stent system from the FDA.
As a result, we believe that the agency will approve the device upon the
resolution of the restrictions imposed by the corporate warning
letter.
In
addition, enhanced reporting requirements and modifications to our quality
systems may result in incremental medical device and vigilance reporting, which
could adversely impact physician perception of our products.
Strategic
Initiatives
In 2007,
we announced several new initiatives designed to enhance short- and long-term
shareholder value, including the restructuring of several of our businesses and
product franchises; the sale of non-strategic businesses and investments; and
significant expense and head count reductions. Our goal 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, and we committed to, an expense
and head count reduction plan, which we anticipate will result in the
elimination of approximately 2,300 positions worldwide. 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 be substantially complete worldwide
by the end of 2008. Refer to Quarterly Results and
Note G – Restructuring-related
Activities to our unaudited condensed consolidated financial statements
included in Item 1 of this Quarterly Report for more information on these
costs.
Divestitures
During
2007, we determined that our Auditory, Vascular Surgery, Cardiac Surgery, Venous
Access and Fluid Management businesses were no longer strategic to our on-going
operations. Therefore, we initiated the process of selling these businesses in
2007, and completed their sale in 2008, as discussed below. We received pre-tax
proceeds of $1.288 billion from the sale of these businesses and our TriVascular
Endovascular Aortic Repair (EVAR) program, and eliminated approximately an
additional 2,000 positions in connection with these divestitures.
In
January 2008, we completed the sale of a controlling interest in our Auditory
business and drug pump development program, acquired with Advanced Bionics
Corporation in 2004, to entities affiliated with the principal former
shareholders of Advanced Bionics for an aggregate purchase price of $150 million
in cash. In
connection with the sale, we recorded a loss of $367 million (pre-tax) in 2007,
attributable primarily to the write-down of goodwill. In addition, we recorded a
tax benefit of $6 million in the first quarter of 2008 in connection with the
closing of the transaction. Also in January 2008, we completed the sale of our
Cardiac Surgery and Vascular Surgery businesses for net cash proceeds of
approximately $705 million. In connection with the sale, we recorded a pre-tax
loss of $193 million in 2007, representing primarily a write-down of goodwill.
In addition, we recorded a tax expense of $56 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 and Venous Access businesses for net
cash proceeds of approximately $415 million. We recorded a pre-tax
gain of $234 million ($129 million after-tax) during the first quarter of 2008
associated with this transaction.
Further,
in March 2008, we sold our EVAR program obtained in connection with our 2005
acquisition of TriVascular, Inc. for $30 million in cash. We discontinued our
EVAR program in 2006. In connection with the sale, we recorded a pre-tax gain of
$16 million ($35 million after-tax) in the first quarter of 2008.
In
addition, in June 2008, we signed definitive agreements to sell the majority of
our investments in, and notes receivable from, certain publicly traded and
privately held entities for gross proceeds of approximately $140 million. In
connection with these agreements, and the sale of certain other non-strategic
investments during the quarter, we recognized pre-tax losses of $96 million ($64
million after-tax) in the second quarter of 2008 and expect to recognize
estimated pre-tax gains of approximately $30 million ($20 million after-tax)
upon the closing of the transactions during the second half of 2008. Refer to
our Other, net
discussion, as well as Note D – Investments and Notes
Receivable to our unaudited condensed consolidated financial statements
included in Item 1 of this Quarterly Report for more information on our
investment portfolio activity.
Quarterly
Results
Net
Sales
In the
first quarter of 2008, we reorganized our international structure in order to
allow for better utilization of infrastructure and resources. Accordingly, we
have revised our reportable segments to reflect the way we currently manage and
view our business. We now have three reportable segments based on geographic
regions: the United States; EMEA, consisting of Europe, the Middle East and
Africa; and Inter-Continental. We combined our Middle East and Africa
operations, previously included in our Inter-Continental segment, with Europe to
form a new EMEA region and merged our former Asia Pacific region into our
Inter-Continental segment. The following table provides our second quarter net
sales by region and the relative change on an as reported and constant currency
basis. We have reclassified previously reported 2007 results to be consistent
with the 2008 presentation.
|
|
|
|
|
|
|
|
Change
|
|
|
|
Three
Months Ended
|
|
|
As
Reported
Currency
Basis
|
|
|
Constant
Currency
Basis
|
|
|
|
June
30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
1,088 |
|
|
$ |
1,118 |
|
|
|
(3 |
%) |
|
|
(3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
531 |
|
|
|
457 |
|
|
|
16 |
% |
|
|
3 |
% |
Inter-Continental
|
|
|
386 |
|
|
|
357 |
|
|
|
8 |
% |
|
|
(3 |
%) |
International
|
|
|
917 |
|
|
|
814 |
|
|
|
13 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divested
Businesses
|
|
|
19 |
|
|
|
139 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
$ |
2,024 |
|
|
$ |
2,071 |
|
|
|
(2 |
%) |
|
|
(7 |
%) |
|
|
|
|
|
|
|
|
Change
|
|
|
|
Six
Months Ended
|
|
|
As
Reported
Currency
Basis
|
|
|
Constant
Currency
Basis
|
|
|
|
June
30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
2,205 |
|
|
$ |
2,287 |
|
|
|
(4 |
%) |
|
|
(4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
1,039 |
|
|
|
926 |
|
|
|
12 |
% |
|
|
(1 |
%) |
Inter-Continental
|
|
|
776 |
|
|
|
670 |
|
|
|
16 |
% |
|
|
4 |
% |
International
|
|
|
1,815 |
|
|
|
1,596 |
|
|
|
14 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divested
Businesses
|
|
|
51 |
|
|
|
274 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
$ |
4,071 |
|
|
$ |
4,157 |
|
|
|
(2 |
%) |
|
|
(7 |
%) |
The
following table provides our second quarter worldwide net sales by division and
the relative change on an as reported and constant currency basis. In addition
to the sale of certain of our businesses in the first quarter of 2008, we began
integrating our Electrophysiology business with our CRM business in order to
better serve the needs of electrophysiologists by creating a more efficient
organization. Further, we integrated our remaining Oncology franchises into
other business units. We have reclassified previously reported 2007 results to
be consistent with the 2008 presentation.
|
|
|
|
|
|
|
|
Change
|
|
|
|
Three
Months Ended
June
30,
|
|
|
As
Reported
Currency
Basis
|
|
|
Constant
Currency
Basis
|
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interventional
Cardiology
|
|
$ |
707 |
|
|
$ |
741 |
|
|
|
(5 |
%) |
|
|
(11 |
%) |
Peripheral
Intervention
|
|
|
154 |
|
|
|
153 |
|
|
|
0 |
% |
|
|
(4 |
%) |
Cardiovascular
|
|
|
861 |
|
|
|
894 |
|
|
|
(4 |
%) |
|
|
(9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurovascular
|
|
|
92 |
|
|
|
88 |
|
|
|
4 |
% |
|
|
(5 |
%) |
Peripheral
Embolization
|
|
|
23 |
|
|
|
25 |
|
|
|
(2 |
%) |
|
|
(8 |
%) |
Neurovascular
|
|
|
115 |
|
|
|
113 |
|
|
|
2 |
% |
|
|
(5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiac
Rhythm Management
|
|
|
578 |
|
|
|
524 |
|
|
|
10 |
% |
|
|
5 |
% |
Electrophysiology
|
|
|
38 |
|
|
|
36 |
|
|
|
5 |
% |
|
|
1 |
% |
Cardiac
Rhythm Management
|
|
|
616 |
|
|
|
560 |
|
|
|
10 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endoscopy
|
|
|
243 |
|
|
|
214 |
|
|
|
13 |
% |
|
|
7 |
% |
Urology
|
|
|
109 |
|
|
|
100 |
|
|
|
9 |
% |
|
|
7 |
% |
Endosurgery
|
|
|
|