Boston Scientific: Making the Most of Its First 25 Years

Originally Published MDDI August 2004

Erik Swain

August 1, 2004

19 Min Read
Boston Scientific: Making the Most of Its First 25 Years

Originally Published MDDI August 2004


The stunning growth of the company during its 25-year history reflects the upward and sometimes explosive growth of the device industry as a whole.

Erik Swain

The Biliary Wallstent Endoprosthesis stent  can help reopen liver ducts obstructed by abnormal tissue growth. 

The year is 1979. The medical device industry is worth $10.3 billion and has only one company, Medtronic Inc., of any significant size. U.S. medical device regulations have been codified for only three years, and FDA is still figuring out how to implement them. The first magazine covering device manufacturing, MD&DI, has just begun publication. In this uncertain, diversified, decentralized environment, Boston Scientific Corp. is founded. The new company, a consolidation of several small medical device firms whose history dates back as far as 1965, starts out with sales of $2 million in its first year. The much larger pharmaceutical industry has only started to take an interest in the device sector.

The year is 2004. The medical device industry is worth $93.8 billion and includes a number of billion-dollar companies. Strict FDA regulations hold sway over the industry. MD&DI is in its 25th year of publication and has grown its coverage in accordance with the increasingly complex medical device sector. Small firms remain the source of much of the industry's innovation, but the large firms are the ones that make the most headlines and attract the most interest from the financial markets. One of those behemoths is the 25-year-old Boston Scientific, which had sales of $3.5 billion in 2003 and is expected to exceed that in 2004. Behind the success is the company's U.S. launch of its Taxus drug-eluting stent, a revolutionary technology that is radically changing the cardiovascular field. It represents the wave of the future—drug-device combination products. 

The dramatic growth and diversification of the Natick, MA–based company parallels that of the industry as a whole. While the growth curves aren't an exact congruence— sometimes Boston Scientific was ahead of the trends, other times it was unaffected by them—in many cases the forces that allowed the company to advance also propelled the progress of the entire industry. Like MD&DI, the growth of Boston Scientific also tells the story of the past 25 years in the device industry.

The Hemashield woven graft (right) is used to repair or replace damaged arteries.

Boston Scientific's chief predecessor company, Medi-tech, was a pioneer in developing the steerable catheter and the balloon catheter. These days, venture capitalists and large device companies would be champing at the bit to invest in such a firm. But that was not the case in 1979. Instead, John Abele, the president of the company and a minority shareholder of Medi-tech, teamed up with Peter Nicholas, who had run the medical products division of Millipore Corp., to form Boston Scientific and buy the outstanding shares of Medi-tech. Nicholas became chairman and CEO and still holds the former position today. Abele served as cochairman.

“The financial markets hadn't recognized the device industry as having much value,” Abele said. “So financing was a bit tricky, and a lot of the companies were inventor-founded and -led.”

One reason for the industry's low profile was that it was not seen as a force that helped shape the healthcare landscape. Instead, its marketing approach consisted almost entirely of reacting to what physicians wanted. Through Abele's and Nicholas' efforts, Boston Scientific was one of the first device companies to market aggressively. It was not an easy transition.

“The industry philosophy was, ‘Tell us what you want and we'll build it for you,'” Abele said. The device industry relied on physicians to provide all the criteria. Boston Scientific had a slightly different idea. “We felt that there was an opportunity to get more involved.”

Not only did that mean becoming a visible presence at trade shows and forging a more give-and-take relationship with physicians, it also meant giving talks at medical schools, which was unheard of for a private-sector company at the time. In 1965, Abele had helped found the American Association for Medical Instrumentation to close the physician-engineer-industry-government-academia dialogue gap. These connections influenced Boston Scientific's early marketing approach.

“The idea of somebody from business giving a presentation at a medical school, even if it were technical, was heretical,” Abele said. “But good relationships, objective noncommercial presentations, and interest in the novel and disruptive technology we had developed carried the day.” Another factor was that Nicholas created separate business units to focus on different device markets, enabling a more effective sales strategy. While common today, this structure was rare at the time.

Growing Pains

The landscape in 1979, however, was not entirely conducive to the interaction the company needed to grow its business. Industry was full of individualistic entrepreneurs who weren't thrilled about the new FDA regulations. In the first issue of MD&DI, Larry Pilot, associate director for compliance in FDA's Bureau of Medical Devices, wrote, “These days, it is . . . fashionable to express disdain over the growth and complexity of government regulations.” 

Physicians weren't interested in ceding assessments of safety and effectiveness to FDA. The surgical establishment and their academic societies had little interest in industry telling them how to improve patient care. In fact, it took years for makers of balloon catheters and other minimally invasive devices to convince other healthcare stakeholders that minimally invasive procedures should be performed whenever possible. In cardiology, a primary factor was that these new technologies sparked a turf battle between cardiologists and cardiac surgeons.

Armed with the new techniques, cardiologists wanted to shift their roles from diagnosticians to surgeons. It took opinion leaders such as Andreas Gruentzig, MD, to educate physician colleagues about the benefits of balloon catheters, and pave the way for acceptance of later minimally invasive techniques, such as laparoscopic gall bladder removal. “The introduction of angioplasty really was, in my mind, a precursor to other forms of less-invasive surgery,” Abele said. “It showed the impossible was very possible.

Abele: Fields such as cardiology and urology presented an opportunity for Boston Scientific's technology to evolve.

The barriers to the introduction of those technologies weren't technical as much as they were political. The power structure of the hospitals gave surgeons absolute authority over everything, Abele explained. “Our strategy was to find the Gruentzigs of the world, who would look at a new technique and then do the appropriate research, teaching, and communicating,” he said. In the 1970s, he said, many surgeons felt minimally invasive surgery was immoral and unethical and that it was “safer to have a big opening because if something went wrong it was easier to fix. It took a while for it to become evident to all that it reduced risk, trauma, cost, and time.”

Of course, the technologies took quite some time to refine. Angioplasty systems went through several iterations before designs were found that doctors were comfortable with. Attempts to apply lasers and fiber optics to vascular catheters resulted in lots of money spent on a project doomed by insurmountable technical obstacles. But medical device entrepreneurs have never let failure stop them from trying new ideas, and Boston Scientific's management was no different. “We learned from our mistakes; that's part of what growth is all about,” said Abele.

By the mid-1980s, the industry had been regulated for 10 years. Karl Bays, then-chairman of Baxter Travenol Laboratories (Deerfield, IL), said the industry had “come nowhere near as far as we can, and must, come.” Despite the regulatory burden, manufacturers must guard against the temptation to blame a lack of progress on regulation and instead to focus on ways to encourage innovation, he wrote in the June 1986 issue of MD&DI. “The manufacturers of medical products must never be satisfied with the current level of technology and innovation,” he said.

During those early years, physicians had retained much of their roles as gatekeepers of new medical technology. Gradually they became more willing to recommend new technologies by word of mouth, and some began to give their articles in scientific and medical journals more of a technological focus. Many medical products were still the result of custom development for physicians. And FDA had yet to begin regulating the market as strongly as it does today. Initial use of devices on patients was more likely to occur on an individualized basis than as part of a formal clinical trial.

“Were patients at risk? I would argue probably no more than they are today,” Abele said. “Physicians were perhaps a bit more technical back then. They shaped their own catheters and customized products to the needs of specific patients. That doesn't happen today, and patients may be worse off because of it.”

A 1970s Medi-tech poster advertises its soft-steerable catheter system for catheterization of various veins and organs.

Another industry watershed was the changing of patent laws in 1982 that made patents more difficult to break. For an industry that derives a tremendous amount of its value from intellectual property, this significantly changed the dynamic of the field.

A New Era for Device Technology

By 1990, FDA's PMA/510(k) review process was firmly in place, clinical trials became more of an expectation, and the agency's new commissioner, David Kessler, distrusted industry to the point that he forbade reviewers from taking phone calls from applicants. Industry became more thorough in its research and development. But Abele and other industry players from the era argued that FDA's “policeman” approach also stifled innovation and drove up costs. “In the current atmosphere of mistrust and confrontation, each party appears to be regressing into knee-jerk reactions,” wrote Kshitij Mohan, then–vice president for Baxter Healthcare, in the January 1990 issue of MD&DI.

More than ever, Boston Scientific and the other device companies that placed a strong emphasis on growth had to rely on their relationships with physicians to demonstrate credibility. Boston Scientific was one firm that had supported the live demonstration–course method of teaching new procedures to physicians. Initially, the medical societies dismissed the practice as unrigorous and unethical, but 80% of those who participated found them more effective than learning from a journal article. “That's been an extraordinary change in how we learn and how we evaluate a new technology over the past 25 years,” Abele said. “People get a chance to understand the actual science of the technology in the device, and they see and hear supporters and opponents debate the merits and the risks. Even a bad device can be used well by a well-trained physician, but a good device can be screwed up by a poorly trained one.”

From the beginning, the company focused on how to adapt the technologies it had developed for one field, usually cardiology, to other fields. This “platform approach” is common in today's device industry but wasn't back then. “We always thought that a primary difference between us and others was that we were not focused on one marketplace,” Abele said. “For example, radiology was big on guidewires, but urology, gastroenterology, and cardiology weren't. But communication between those specialties was, and still is, almost nonexistent. Each of those fields presented an opportunity for us to evolve our technology. In essence, every R&D dollar we spent had benefits in multiple fields, giving us a three-to-four–times value for our spending. We recognized that all these fields had similar problems and approached them in slightly different ways.”

Oddly, however, the event that started Boston Scientific and others on the path to where the modern device industry is today, in terms of structure and economics, was the Clinton healthcare plan. Starting in 1992, the sweeping reforms promised by the Clinton plan essentially put the healthcare market on hold. Abbott Laboratories (Abbott Park, IL) had been a substantial investor in Boston Scientific since 1983 and had retained an option to buy. But Abbott, because of the uncertainty, decided not to exercise its option. That left Boston Scientific at a crossroads.

First introduced in the 1970s, the Greenfield Vena Cava Filter is permanently implanted in the vena cava to help reduce the risk of pulmonary embolism.

“Neither Peter nor I wanted to go public, because we were concerned about managing to short-term expectations as opposed to strategic building, but we realized it was the least-worst option,” Abele said. “Out of the Clinton effort was going to come some sort of managed care, and the healthcare industry was going to have to get more efficient. If we were not going to be able to grow faster, we were at risk of being marginalized. Going public gave us the currency to position the company for making acquisitions.” The initial public offering came on the New York Stock Exchange in 1992.

It turned out to be good timing. It was also around this time that pharmaceutical companies started acquiring or investing in device firms, and device firms began their own wave of mergers and acquisitions. Ironically, a primary reason for the activity was that valuations were substantially depressed from the uncertainty caused by the Clinton plan. But soon enough, the failure of the Clinton plan sent healthcare stock prices spiraling upward.

What survived from the Clinton plan, though, was a new industry focus on keeping costs down. “Since 1993, the industry has been about improving quality of life, but also about doing it for less,” said George Blank, president and CEO of The Medtech Group Inc. (South Plainfield, NJ), a contract manufacturer that has had contact with Boston Scientific for about 15 years. “The development of the stent, which costs much less than open-heart surgery, is a perfect example of market forces and the events of 1993.”

In 1995, MD&DI's January issue addressed the beginnings of drug-device combinations. “Strategically, a lot of pharmaceutical companies have been looking at diagnosis and treatment delivery as the direction in which medicine is heading,” said Roger Stoll, who was then president and CEO of Ohmeda. That year was also a defining year for Boston Scientific.

By the end of 1995, Boston Scientific would be transformed into a major device firm. In just that one year, the firm went from 2800 employees to 8000 and from 3000 products to 8500. It made five acquisitions and entered into two alliances. One of the alliances, with Medinol, highlighted the importance of stent technology, which would drive growth in the cardiovascular sector to the present day. The company also began looking to services such as education for new revenue streams. As the public markets demanded more substantial growth from the major device firms, industry found itself under pressure to develop and acquire new products more quickly.

The Taxus Express Paclitaxel-eluting coronary stent system can reduce restenosis and treat a variety of lesions. The stent has the potential to become the biggest-selling device in industry history.

Boston Scientific was one company that had little trouble adapting to that climate. “We used to go four to five years without a major new product in device-land, because we could,” said Tom Gunderson, a senior research analyst for Piper Jaffray (Minneapolis) who has covered Boston Scientific since it went public. “But then there came the imperative to get newer and better products out as fast as you can. In those days, Boston Scientific was way beyond everyone else from a speed standpoint. They had a high-level vice president who was in charge of just making sure product innovation went as fast as it could. They were strong in the market development side as well. They were good at taking over a technology and improving it.”

The most significant was the purchase of Scimed Life Systems Inc., another pioneer in angioplasty and other cardiovascular technologies. This sealed Boston Scientific's status as a major player in the most lucrative device field, cardiology. “That was not just for size, but for strategic mass,” said Abele.

The Boom Years

Suddenly, the device industry was growing companies of substantial size, and attracting tremendous interest from Wall Street. But, as markets go up, they also come down. A string of disastrous initial public offerings in 1995 and 1996 put the device industry out of favor on Wall Street, and the frenzy over tech stocks made sure it stayed that way for a few years. With the notable exception of Johnson & Johnson, the pharmaceutical companies that had bought up device companies a few years before began to sell them off. Boston Scientific had amassed a great amount of debt from its acquisition spree, and some industry observers became concerned as to whether the firm would collapse under its own weight. In the mid- and late 1990s, its stock often struggled because of those concerns. In 1997, MD&DI reported that in a survey of 130 medical device company CEOs, “66% felt that medical device and diagnostic company initial public offerings issued during 1995 and 1996 were overvalued.”

But a collapse did not happen to Boston Scientific, for several reasons that have become indicators of success throughout the entire device industry. One was that its acquisitions were, for the most part, integrated smoothly and made profitable quickly. Abele estimates about an 80% success rate, whereas the norm for the device industry is less than 50%. “We are a multi-billion- dollar company, but we are still entrepreneurial,” he said, adding that the company still forms relationships with smaller companies. Their smaller partners value these relationships as well, he said. “We are certainly not perfect, but a lot of owners of companies we've purchased will tell you they've had a good experience with us,” which he said is not commonly heard. 

Another reason the firm avoided failure was that it never abandoned its commitment to a long-term growth strategy. Management spent much time analyzing areas in which fast growth and strong product development would take place in the future. “We would look forward not just to see where we would continue to grow, but to plan strategy for growth in areas that we weren't even involved in yet,” Abele said. “For example, we amassed a portfolio of patents in gene therapy beginning more than 10 years ago. We acquired Target Therapeutics (in 1997) to get a foothold in the neurology business.” By the mid-1990s, it became clear that not all device sectors were created equal, and a strong presence in fast-growing, Wall Street–hyped areas like cardiology and neurology was necessary to become an industry giant. Another positive factor was that after Kessler's departure, FDA became more interested in communication and collaboration with industry, making faster review times a priority and enabling innovative products to come to market more quickly.

“They were able to grow their way out of debt,” said Lars Enstrom, a director for investment bank Houlihan Lokey Howard & Zukin (Los Angeles). “And that was because they were in high-growth areas. They made very good acquisitions and established growth platforms. If they saw something they felt they needed to have, they went out and got it.”

As many device firms do when they reach a certain size, in 1999 Boston Scientific brought in a CEO from the outside. Jim Tobin had run Baxter International and then Biogen Inc., and he knew a few things about streamlining a large organization.

“He is an experienced, aggressive manager who moved quickly to consolidate a lot of their businesses and make them more efficient,” said Blank. “Nicholas is a visionary who bought a lot of successful companies and helped accelerate the pace of technology we've seen. Tobin's team is more operations oriented. They are building size and might strategically, which is not easy to do.”

Around that time, device firms started to rely more on contract manufacturers to produce their products. It was part of an industry-wide trend to focus on what the firm did best and then outsource as much of the rest as possible. Boston Scientific may not have been the first to rely heavily on these contractors, but it was ahead of the curve and was one of the most creative in making those arrangements. 

“They were looking for unique ways to improve productivity and efficiency,” said J. Randall Keene, CEO of Avail Medical Products (Fort Worth, TX). “They were looking for more than a vendor. They were looking for a partner. Tobin encouraged everyone to think outside the box. The pace and demand for these new products and the speed with which they get produced are significantly enhanced today.” 

In the 21st century, much of the enthusiasm about the industry centers on drug-device combination products. In recent years MD&DI has begun covering them extensively, especially after April 2003, when J&J received the first FDA approval for a drug-eluting stent. Boston Scientific has been a major player, too, with its Taxus drug-eluting stent having the potential to become the biggest-selling device in industry history. But as with many breakthroughs in the device industry, this one was years in the making and took a lot of foresight and planning. “The irony is that we saw the potential of drug-device combination products in the 1970s, first in the embolization field, which could use a physical or biological approach,” Abele said. “From there we saw that it was necessary to help the body help itself.” Indeed, there are those who believe that the technology for drug-eluting stents was there in the 1990s and was held back only because firms weren't able to perfect the necessary coatings. 

Intellectual property (IP) played a major role as well. Boston Scientific was able to make real headway with its IP only after acquiring Scimed in 1995 and Schneider Worldwide in 1998. The latter had been owned by drug giant Pfizer and had defeated Boston Scientific in court over a rapid-exchange angioplasty technology. When Pfizer decided to exit the device business, Boston Scientific, which still craved that patent, snapped up Schneider for $2.1 billion, an amount virtually unheard of in the device industry at that time. Resources from all three companies proved crucial in developing Taxus, and Schneider's polymer technology may have been the most important piece of the puzzle.

Taxus is now on pace to become that rarest of medical products—the billion-dollar device. Acquisition is still the core growth strategy, as evidenced by the recent $750 million purchase of Advanced Bionics Corp., which is expected to make the company a leader in the field of 
neurostimulators. With the drug and device markets converging and new ways of thinking about how to repair the body coming into vogue, firms with the resources to develop blockbuster products and the smarts to sense the next major innovations will lead the device industry through its next 25 years. It would surprise no one if Boston Scientific continued to evolve, ensuring that it remains one of those leaders. 

Copyright ©2004 Medical Device & Diagnostic Industry

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