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Fitch Affirms Boston Scientific's IDR at 'BB+'; Outlook to Positive

^{Published on 2010-10-29 10:35:58 - Market Wire}
 

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the Issuer Default Rating (IDR) and outstanding debt ratings on Boston Scientific Corp. (NYSE: BSX) as follows:

--IDR at 'BB+';

--Unsecured bank credit facility at 'BB+';

--Senior unsecured notes at 'BB+'.

The affirmation applies to approximately $6.1 billion of debt and the Rating Outlook has been revised to Positive from Stable.

The rating action follows BSX's announcement that it will divest its Neurovascular business for $1.5 billion in cash. At closing, which is expected by yearend, BSX will receive $1.4 billion and $100 million will be payable as various commercial and transition benchmarks are met. The total after-tax proceeds are expected to be roughly $1.2 billion. The company intends to use about half of the net proceeds to pay down debt, while the other half will be allocated for acquisitions. While Fitch views the divestiture and subsequent debt paydown as a positive credit event, expected pro forma leverage using LTM financial data at June 30, 2010 (total debt/operating EBITDA) of 2.7 times (x) after the anticipated paydown remains reflective of a 'BB+' rating category for this firm.

The Positive Outlook reflects the fact that the anticipated debt paydown accelerates Fitch's timeline for BSX to reduce leverage below 2.5x, which is one key factor that could lead to an upgrade to 'BBB-'. While BSX is still addressing share challenges related to its implantable cardioverter defibrillators (ICDs) business, Fitch believes the company has regained some of the lost market share related to the ship-hold. Fitch would consider a one-notch upgrade if BSX's operations demonstrated durable improvement and a sustainable downward trend in leverage.

The key rating drivers for this credit are leverage measured as total debt-to-EBITDA, EBITDA margins, free cash flow and general operational stability. The 'BB+' leverage range for this credit is approximately 2.5x-3.0x. Margin variability of less than 250 basis points, material free cash flow generation and relatively stable operations are expected for this rating.

BSX's drug-eluting stent (DES) business continues to face pressure from Abbott Lab's Xience DES in the Japanese market, and normal pricing declines within most geographic markets continue. However, moderate growth in procedural volume, increases in the number of implants per procedure and higher year-over-year DES penetration rates in the U.S. are helping to offset some of the pressure. BSX has retained relatively stable market shares in the U.S. and Europe. Importantly, BSX has recently introduced Promus Element (its next generation DES) into the European market, and has gained some traction. The company is also expected to launch Promus Element into the U.S. market in 2012. It is worth noting that BSX does not pay royalties on Promus Element sales, and there is no identical stent in the marketplace or in development. On balance, Fitch expects profitability and growth to improve for BSX's DES segment during the next few years.

Revenue growth for BSX's Endosurgery, Electrophysiology and Peripheral Interventions businesses persists. Moderate procedure growth and relatively stable pricing remain supportive for profitable growth in these segments. In addition, BSX remains committed to ongoing investment in new product development for these businesses.

BSX continues to resolve a significant number litigation issues, including $1.725 billion in cash payments to Johnson & Johnson (JNJ) to settle three patent lawsuits. Nevertheless, financial risk related to unresolved litigation remains. Regulatory issues regarding its drug-eluting stent (DES) and cardiac rhythm management (CRM) businesses have been largely rectified.

While the reform-related 2.3% excise tax (beginning in 2013) on U.S. device sales are expected to moderately pressure margins in the intermediate term, Fitch believes BSX's focus on cost reduction and the continued development of new value-added, higher margin devices will help mitigate this risk. The recently enacted healthcare reform legislation is also expected to result in moderate volume increases in 2014-2016, when the bulk of the increase in the number of insured is expected to occur. While the final rules and regulations have yet to be written for the reform legislation, Fitch believes healthcare reform will not affect BSX's credit rating.

Fitch expects BSX's acquisition strategy will remain targeted, focusing on areas that offer innovation and growth. Share repurchases are also expected to remain a low priority for the firm in the intermediate term as it focuses on deleveraging and growth opportunities. During 2010-2011, Fitch expects BSX will operate with leverage (total debt/EBITDA) ranging between 2.4x-2.7x. In 2010, Fitch expects BSX will generate $1.3 billion to $1.6 billion in free cash flow (FCF), excluding approximately $2 billion in litigation payments.

Free Cash Flow (Net Cash Flow From Operations Less Capital Expenditures) for LTM ending June 30, 2010 was a negative $151 million, which includes a $1 billion cash litigation payments to Johnson & Johnson. BSX had approximately $811 million in cash/short-term investments; full availability on its $2 billion revolver, maturing on June 30, 2013; and full availability on its $350 million 364-day accounts receivable facility, maturing in August 2011. The company had approximately $6.05 billion in debt with roughly $950 million maturing or amortizing in 2011, $200 million in 2012, $700 million in 2013, $600 million maturing in 2014 and $1.25 billion in 2015.

Additional information is available at '[ www.fitchratings.com ]'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 16, 2010).

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

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