1 Boston Scientific Place
Since its origin in the late 1960s, Boston Scientific's mission has been 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. This is accomplished through the continuing refinement of existing products and procedures and the investigation and development of new technologies which can reduce risk, trauma, cost, procedure time, and the need for aftercare.
Boston Scientific Corporation is a pioneer in providing medical devices for less invasive surgical procedures. As improvements in medical imaging made such procedures more practical, the company established itself as a leader in coronary stents and stent systems. After going public in 1992 the company grew tremendously through acquisitions, with revenue reaching $2.84 billion in 1999. Toward the end of the decade, however, the company began experiencing such problems as product recalls and a financial scandal that caused its stock to fall out of favor with Wall Street.
Early History: 1969--79
Boston Scientific Corporation was founded in 1979 by John Abele and Peter Nicholas, who met while watching their children play soccer. Nicholas, a Wharton M.B.A., had worked for pharmaceutical company Ely Lilly & Co. since 1968. Nicholas was mainly interested in management; Abele was more technically oriented. He had majored in philosophy and physics at Amherst and had been employed selling medical devices for Advanced Instruments, Inc. In 1968 Abele met Itzak Bentov, inventor of a steerable catheter that was used in less invasive surgical procedures. With financial backing from Cooper Laboratories, Abele began marketing the device through Medi-Tech, Inc., a company in which Abele had acquired an equity interest. In 1969 Medi-Tech introduced its first products, a family of steerable catheters that were used in some of the first less invasive procedures.
By the time Abele and Nicholas met, Cooper Laboratories wanted to sell the medical device company. Abele and Nicholas founded Boston Scientific Corporation for the purpose of acquiring Medi-Tech, Inc. The two men received $500,000 in bank financing and raised another $300,000.
In its first year Boston Scientific reported revenues of about $2 million. Its first products included catheters for gall bladder surgery. The early 1980s marked a period of active marketing, new product development, and organizational growth. The company focused on catheters and other products that could be used as alternatives to traditional surgery. As medical imaging techniques improved, less invasive procedures became more feasible. The catheters allowed doctors to perform surgical procedures through little incisions. Such procedures were also much less expensive. The company soon expanded its line of catheter-based devices to include heart, vascular, respiratory, gastrointestinal, and urological applications.
Capital Needs Affect Growing Private Company: 1980s
By 1983 sales were $16 million. To meet the company's voracious working capital needs, Abele and Nicholas sold a 20-percent interest in Boston Scientific to Abbott Laboratories in return for $21 million, which Abbott would pay over the next four years. The company needed large amounts of working capital, because of the long lead-time between product development and product marketing. In addition, the medical devices that Boston Scientific made required approval by the U.S. Food and Drug Administration (FDA), a process that typically took several years. As a result, the company lost $900,000 in 1988 on sales of nearly $100 million. After learning how to shorten the approval time from the FDA, Boston Scientific again became profitable, earning $23.5 million on sales of $159 million. In 1991 sales reached $230 million, with earnings of $42 million.
Going Public and Acquisitions: 1992--2000
Boston Scientific went public in May 1992 with an initial public offering (IPO) of 23.5 million shares priced at $17 a share that raised $400 million in capital. Following the IPO, co-founders Nicholas and Abele and their families owned two-thirds of the firm's stock. Nicholas was in charge of the firm's management; Abele had removed himself from day-to-day operations around 1990. Abbott Laboratories sold its shares back to Boston Scientific at the time of the IPO.
The company had four operating divisions: Medi-Tech, which specialized in radiology; Mansfield, for cardiology; Microvasive Endoscopy for gastroenterology; and Microvasive Urology. Boston Scientific would typically introduce a device for use in less critical places, such as the urinary tract, then apply it to higher-risk situations, such as those in cardiology. This helped speed up development of new products. The company posted 40 percent revenue growth for the first half of 1992, while earnings for the same period grew by 28 percent compared to the same period in 1991. For the year, Boston Scientific had revenue of $315 million.
In 1993 sales reached $380 million, while net income rose to nearly $70 million. Between 1994 and 1995 sales rose from $449 million to $1.2 billion, as the company began an aggressive four-year program of strategic acquisitions. International sales accounted for about one-third of the firm's 1995 revenue.
Beginning in fall 1994, Boston Scientific acquired nine companies over a 16-month period, spending about $2.5 billion. During this period it acquired several companies that made niche products that could be marketed worldwide. It paid $400 million for Meadox Medicals Inc., an Oakland, New Jersey-based producer of blood vessel replacement devices. Heart Technology Inc. of Redmond, Washington, was acquired for $450 million; it made surgical tools to unclog arteries. By acquiring Meadox, Boston Scientific gained graft technology that would have taken five years to develop. Heart Technology's single product, Rotablator, was a catheter with a spinning diamond bit that cleaned out clogged arteries. Rotablator's sales had skyrocketed from zero in 1993 to $80 million in 1995.
At the end of 1995 Boston Scientific's market capitalization had grown to $8.5 billion, compared to $1.5 billion at the end of 1994. Its workforce had grown from 2,000 to 8,000 employees. Its product line increased from 3,000 to 8,000 items. With the help of Andersen Consulting, the company was developing a global systems project that would standardize business practices for the firm and its new acquisitions.
In the latter half of the 1990s, trends supporting demand for medical devices included political pressures to develop new cost-effective technology; demand for fast, effective, and safe procedures; and a broad international market. The FDA responded to pressure reduce its review time for certain types of new devices to 90 to 120 days instead of 18 months or more. Boston Scientific's main business, products for interventional cardiology, served a $3-billion global market that was expected to grow at least 15 percent annually. Its other markets, neurointerventional medicine and endoscopy, were each growing at 15 to 20 percent annually. At the end of 1996 the company had a direct sales force in 17 countries and distributors in 85 additional countries. Its strategy was to acquire or develop niche products and market them worldwide. Foreign sales accounted for 38 percent of Boston Scientific's revenue in 1996 and were expected to reach 50 percent in the next couple of years.
Reviewing Boston Scientific's performance in its January 13, 1997 issue, Medical Economics asked the then-rhetorical question, 'What could go wrong with such a success story?' Unfortunately for Boston Scientific and its investors, the correct answer was, 'Plenty.'
Growth and Setbacks: 1997--2000
Boston Scientific continued to grow through acquisitions in 1997. Target Therapeutics, Inc. made products used to treat patients with strokes, including microcatheters and microcoil products used in to the small blood vessels of the brain, heart, and extremities. A new coil that Target developed received FDA approval in 1995; it offered a relatively safe and cost-effective treatment for patients with brain aneurysms. Boston Scientific acquired Target Therapeutics for about $1.1 billion in stock in 1997. The acquisition gave Boston Scientific immediate leadership in neurosurgical products and a line or products to treat aneurysms, and expanded its overseas sales.
By mid-1997 Boston Scientific's rapid growth rate was expected to level off at about 25 percent annually. The company announced it would spend $300 million to upgrade five manufacturing facilities. In addition, it was incurring significant costs in integrating more than a dozen acquisitions made since late 1994. According to Forbes, Boston Scientific's main product line--balloons for angioplasty--were becoming a commodity. Surgeons were showing a preference for balloons with stents attached to keep arteries open. While Boston Scientific marketed such devices in Europe, it did not sell them in the United States. The U.S. market leader in this area was Johnson & Johnson, and Medtronic, another competitor, received approval for its stent-balloon combination in June 1997.
Boston Scientific's stock took two significant tumbles during 1997. One occurred when its first-quarter profits failed to meet Wall Street's expectations; stock fell 33 percent. The second occurred after the company warned that its third-quarter earnings would also fall short. In September 1997 it fell 17 percent, from around $76 a share to around $63. For 1997, Boston Scientific had revenue of $1.87 billion and earnings of $139.3 million.
In mid-1998 Boston Scientific announced it would spend $2.1 billion to acquire Schneider Worldwide, the vascular devices unit of Pfizer, Inc. Schneider sold surgical stents and artery-clearing devices used in balloon angioplasty. The acquisition was Boston Scientific's largest to date and gave the company a major position in the growing cardiovascular stent market. For 1997, Schneider had worldwide sales of $330 million. It was headquartered near Zurich, Switzerland, and had 2,200 employees worldwide, about 1,200 of whom were in the United States.
In October 1998 Boston Scientific announced a recall of its coronary stent delivery system called 'NIR on Ranger with Sox.' The company had received more than 100 reports of balloon leakage in the system. The product began shipping in August 1998 to 200 hospitals and medical centers in the United States. By the time of the recall, about 36,000 systems had been shipped and an estimated 25,000 were in use. The recall raised regulatory concerns at the FDA, which had not been notified of manufacturing changes in the stent system. The system had been developed with business partner Medinol Ltd., based in Tel Aviv, Israel.
In November 1998 the company announced it had found about $45 million of 'questionable sales' at its Japanese subsidiary for the current year, and an additional $40 million of 'improper sales' in previous years. The announcement, coupled with the firm's product recall, pushed Boston Scientific's stock down 11 percent to around $46. The stock had reached a high of $81 in August prior to the recall. For 1998 Boston Scientific reported revenue of $2.23 billion and a net loss of $264 million.
In February 1999 Boston Scientific announced it would cut about 2,000 jobs in 1999 as part of its restructuring following its recent string of acquisitions. About 1,500 of the eliminated positions would affect Schneider employees. The company also expected to spend about $62 million on severance costs.
At the end of 1998 rumors surfaced that James R. Tobin would succeed Peter Nicholas as Boston Scientific's CEO. Tobin resigned in December 1998 as CEO of Biogen Inc., a biotechnology company. Tobin was named CEO of Boston Scientific in March 1999 and assumed the position in June, replacing Peter Nicholas, who remained as chairman. Tobin's assignment essentially was to turn the company around. Over the next 14 months he would eliminate 1,900 jobs and close manufacturing operations in three states. During this period Boston Scientific's stock would lose about two-thirds of its value--fallout from the product recalls and Japanese scandal. To help finance its acquisition of Schneider Worldwide, Boston Scientific raised $500 million through a secondary stock offering in mid-1999.
Following its five-year string of acquisitions, Boston Scientific was organized into six divisions. EP Technologies specialized in cardiac electrophysiology. Medi-Tech was a leading developer and supplier of minimally invasive and surgical devices for peripheral vascular disease management, including balloon catheters and metallic stents. Microvasive Urology manufactured diagnostic and therapeutic products for endourology for stone management, incontinence, and prostate disease. Microvasive Endoscopy focused on providing devices and services for gastrointestinal endoscopic procedures. Boston Scientific Scimed Inc. was the company's primary cardiology unit. Target Therapeutics was a leader in neuro endovascular intervention, manufacturing medical devices to treat the brain and other hard-to-reach parts of the body in a minimally invasive manner.
In June 1999 the company received a new patent covering a process for injecting genes into the heart that would allow it to enter the gene therapy field. The process could stimulate the formation of blood vessels and would be used to treat patients with serious heart problems. The patent originated in gene research conducted by CardioGene Therapeutics Inc., which Boston Scientific acquired in July 1998.
In August 1999 Boston Scientific recalled two of its medical laser system used in treating heart disease, the Rotablator RotaLink Advancer and RotaLink Plus systems. The systems employed a high-speed drill that used a blade to clear plaque from a clogged artery. After the company received complaints that the system's brake failed to stop the drill from moving through the artery after it had already cleared the blockage, it issued a voluntary recall. The company had sold about $60 million worth of the Rotablator systems in the first half of 1999 and expected no further sales for the rest of the year.
For 1999 the company reported revenue of $2.84 billion and net income of $371 million. Revenues for the first half of 2000 were expected to suffer from a lack of new products. In the latter half of 2000 the company was planning to introduce a gold-plated stent. Analysts noted that Boston Scientific was lagging behind its two major competitors, Guidant Corporation and Medtronic Inc., in introducing new stents, which typically had one-year life cycles.
Between July 1999 and February 2000 the company's stock price fell by 57 percent, from around $46 to $19 a share. In 2000, Tobin created a new business unit focused solely on heart stents and stent-delivery systems. These had been manufactured by the company's Minneapolis-based Scimed division, which would continue to provide cardiologists with products such as balloon catheters, guide wires, and guide catheters. In addition, Tobin announced he would be naming a chief technology officer to the newly created position.
In March 2000 Boston Scientific received FDA approval to resume marketing its NIR on Ranger with Sox coronary stents, after solving the leakage problems.
In July 2000 Boston Scientific continued its reorganization, cutting 1,000 positions in Minnesota, Washington, and Massachusetts, while adding 100 employees to its Miami operation and 800 jobs to company plants in Ireland. In Miami, some 300 jobs involving the production of biopsy forceps would be transferred to a lower-cost foreign contract manufacturer, while 400 positions for workers making guidewires were added. About 850 workers were dismissed from the company's Watertown, Massachusetts, plant. Facilities in Plymouth, Minnesota, which employed about 750 workers, and Redmond, Washington, with about 350 employees, were to be closed. One of the Watertown sites became the headquarters to the company's Medi-Tech division, which developed vascular surgery and radiology products. The reorganization was expected to save about $70 million in 2001 and $145 million in 2002.
Difficulties between Boston Scientific and Medinol Ltd., its key supplier of coronary stents, led to delayed product launches, according to some analysts. As a result, the company's stock plunged more than $7 in one day in July 2000 to close at $18.5625. Also affecting the stock price were the company's lower-than-expected second-quarter sales and a poor outlook for the rest of 2000. Boston Scientific subsequently entered negotiations to acquire Medinol Ltd., of which it already owned part, as a means of becoming more competitive with rival companies that already made their own stents.
Meanwhile, the episode of fraudulent sales reports for the period from January 1997 through June 1998 from Boston Scientific Japan was resolved with the Securities and Exchange Commission, whose report chastised the company for lacking effective controls at the time.
The year 2000 and those leading up to it were difficult for Boston Scientific. Product recalls and new competitors led to the loss of the company's market-leading position in its key product line, coronary stents and stent systems. Difficulties with its primary supplier of stents added to the company's woes. Its stock fell out of favor with Wall Street, resulting in a significant reduction in the firm's market capitalization. As investors wait for Boston Scientific to return to its leadership position, the company faces multiple challenges.
Principal Divisions:: EP Technologies; Medi-Tech; Microvasive Urology; Microvasive Endoscopy; Scimed; Target Therapeutics.
Principal Competitors: Cook, Inc.; Johnson & Johnson (Cordis Unit); EndoSonics; Medtronic Inc.; Guidant Corp.; Arterial Vascular Engineering Inc.; Human Genome Sciences; GenVec Inc.; Spectranetics Corp.
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