Analysts: More Divestitures on Boston Scientific's Horizon

June 1, 2007

7 Min Read
Analysts: More Divestitures on Boston Scientific's Horizon

On June 11, Aspect Medical Systems Inc. (Norwood, MA) announced that its strategic alliance with Boston Scientific Corp. (Natick, MA) was ending after a two-year period. Formed in May 2005, the alliance was focused on the development of brain-monitoring technology for diagnosing and treating depression, Alzheimer's disease, and other neurological disorders. As part of the collaboration, Boston Scientific had committed to providing Aspect Medical with $25 million to fund research and product development activities.

In the announcement, issued by Aspect Medical, no reason was provided for termination of the alliance. However, industry analysts were not entirely surprised by the move, which was generally seen as having been initiated by Boston Scientific.

In late May, Boston Scientific had suggested that in coming months it might sell off what it described as "noncore assets." At the time of that disclosure, it was widely speculated that Aspect Medical could be on the list. Boston Scientific is the largest holder of Aspect Medical stock, owning approximately 27% of the company's shares, currently valued at around $90 million.

In setting aside the alliance, Aspect Medical said it would immediately acquire 2 million shares of its stock currently held by Boston Scientific at a price of approximately $15.91 per share. The company said the dissolution agreement provided it the right to purchase any or all of the shares held by Boston Scientific over the next six months "at a price of $15.00 per share, or the average of the closing prices of Aspect stock over the 10 trading days prior to Aspect exercising its right to repurchase, whichever is higher." Accordingly, Boston Scientific agreed to sell the stock only to Aspect during the six-month period.

Additionally, Boston Scientific is relieved from all current and future obligations associated with the alliance, and Aspect regains all commercial rights to products developed under the joint venture and previously shared with Boston Scientific.

In a separate but related matter, the two companies also set aside an agreement under which Boston Scientific distributed procedural sedation products developed by Aspect. The companies entered into the agreement in 2002.

"Boston Scientific has been an outstanding partner, and we appreciate its contribution to our success to date," said Nassib Chamoun, president and CEO of Aspect Medical Systems. "Further, we understand Boston Scientific's desire to refocus its strategic priorities following its recent acquisition, and we believe that this agreement creates new opportunities for both parties."

Shortly after Chamoun's announcement, Aspect Medical said it would offer approximately $110 million in notes to finance the repurchase of its stock from Boston Scientific.

Analyst Ro:A disappointing development.

Medtech analyst Isaac Ro, vice president for medical devices at Leerink Swann & Co. Inc. (Boston), says, "While not a total surprise to Aspect Medical, this has to be a disappointing development, particularly in light of the steady advance of good data the company has presented regarding development of its brain-monitoring technologies.

"Aspect Medical now faces the prospect of either financing product development on its own or seeking out a new partner," Ro adds. "And finding a replacement like high-profile Boston Scientific, which is very adept at product commercialization, will not be easy." Nevertheless, Ro says, Aspect Medical has a solid, efficient management structure in place and is committed to advancing its product development initiatives.

According to Aspect Medical, the company's Bispectral Index (BIS) technology, an anesthesia monitoring system , was the first clinically proven and commercially available unit for directly measuring the effects of anesthetics and sedatives on the brain. BIS is reportedly in use at 75% of the leading hospitals in the United States.

When the termination of the Boston Scientific-Aspect Medical alliance was announced, only about $10 million of the $25 million pledged by Boston Scientific had been expended. Funding issues, however, were not believed to be a factor in ending the working relationship between the two companies.

Boston Scientific's current net debt of about $7.2 billion has been attributed largely to its $27 billion acquisition of Guidant and to slowing sales in its core business units. The company is also facing a multitude of lawsuits associated with product failures and subsequent recalls of Guidant's cardiac rhythm management (CRM) products. Industry analysts see the divestiture of Aspect Medical as just one of several moves needed for Boston Scientific to pare down its debt.

"Boston Scientific's decision to end the alliance will net the company in excess of $110 million--considering both the $90 million of the Aspect Medical stock it can sell and the $15 million never expended on the initiative," says Leerink Swann's Ro. "The company will likely use these funds to shore up assets and reduce its debt."

LaViolette:Optimizing assets.

Speaking earlier this month at the Goldman Sachs Global Healthcare Conference, Paul LaViolette, Boston Scientific's chief operating officer, acknowledged that the company plans to announce a significant cost-reduction initiative. He told investors that the plan is not a major financial restructuring but rather an optimization of company assets and business units. He noted that the past year had presented significant challenges to the company's coronary stent and CRM sectors, but that both were showing solid recovery in both domestic and international markets.

Boston Scientific employs 28,000 worldwide, and analysts expect that the company's new chief financial officer, Sam Leno, will announce sizeable staff reductions in the months ahead.

However, at the same time that the business media were abuzz with speculation over what assets Boston Scientific would sell, the company announced that it was closing on a $60 million technology acquisition from Celsion Corp. (Columbia, MD). The acquired technology is focused on treating symptomatic benign prostatic hyperplasia, or what is commonly refereed to as enlarged prostate. Additionally this month, Boston Scientific announced that it had joined with Greatbatch Inc. (Clarence, NY) in providing $7 million in funding to Intelect Medical Inc. (Cleveland, OH) for the development of implantable neuromodulation systems for brain injury recovery.

Also, on June 28, Boston Scientific and CryoCor Inc. (San Diego) announced a strategic collaboration in the field of cryoablation. The collaboration involves the codevelopment of therapeutic solutions for atrial fibrillation. Under the collaboration, CryoCor will be responsible for the development and possible manufacture of a cryoablation console for use with Boston Scientific's internally developed cryotherapy balloon, which may incorporate some of CryoCor's catheter technologies. Upon successful achievement of development milestones, Boston Scientific has agreed to make certain payments to CryoCor. Boston Scientific also has agreed to pay CryoCor royalties on the sale by Boston Scientific of the products developed under the collaboration. In addition to the development program, Boston Scientific purchased shares of CryoCor common stock for an aggregate purchase price of $2.5 million, and agreed to purchase an additional $2.5 million of common stock upon successful achievement of certain development milestones.

News of the new collaboration came just one day after CryoCor announced that an FDA advisory panel had recommended that CryoCor's application for premarket approval for the treatment of atrial flutter be approved by FDA.

Although these recent moves might seem relatively insignificant for a company of Boston Scientific's stature, they suggest a company that is still pursuing a forward-thinking vision. Industry analysts expect that Boston Scientific will place a number of assets on the block in upcoming months--yet none is anticipating a fire sale of noncore assets, nor are analysts questioning Boston Scientific's ability to pay its bills. Instead, most medtech analysts regard the company's current difficulties as short-term, and they generally applaud management's recovery plan and execution.

© 2007 Canon Communications LLC

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