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boston scientific2000_annual

  2. 2. To our employees and shareholders: Boston Scientific’s mission is to improve the quality of patient care and the productivity of health care delivery through the devel- opment 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 tech- nologies which can reduce risk, trauma, cost, procedure time and the need for aftercare.
  3. 3. mission va l u e s letter La mission de Boston Scientific est La misión de Boston Scientific l’amélioration de la qualité des soins Corporation es mejorar la calidad de cliniques et de la productivité de la atención al paciente y la produc- l’administration de ces soins grâce tividad del servicio de atención à la mise au point, la promotion médica mediante el desarrollo y la et la défense de méthodes et de recomendación de dispositivos y dispositifs médicaux moins invasifs. procedimientos médicos menos Ce but est atteint au moyen d’un invasivos. Todo eso se logra mediante perfectionnement continuel des el constante perfeccionamiento produits et méthodes existants ainsi de productos y procedimientos que par la recherche et la mise au existentes y la investigación y el point de nouvelles technologies desarrollo de nuevas tecnologías visant à réduire les risques, le que puedan reducir el riesgo, el traumatisme, les coûts, la durée trauma, el costo, el tiempo del des interventions et la nécessité procedimiento y la necesidad de de suivi. atención o cuidado posteriores. Bei Boston Scientific sind wir stets bemüht, die Qualität der Patientenbehandlung und die Boston Scientific beschouwt het Leistungsfähigkeit der Gesundheit- als haar missie, de kwaliteit en sversorgung durch die Entwicklung productiviteit van de zorgverlening und Förderung von weniger inva- aan patiënten te verbeteren door de siven medizinischen Geräten und ontwikkeling en gebruiksbevordering Verfahren zu steigern – durch van minder invasieve medische hulp- ständige Verbesserung bestehender middelen en procedures. Aan het Produkte und Verfahren sowie realiseren van deze doelstelling Erforschung und Entwicklung wordt gewerkt door een voortgaande neuer Technologien, die verfijning van bestaande producten Risiken, Verletzungen, Kosten, en procedures en door het verrichten Behandlungszeiten sowie van onderzoek naar en de ontwik- den Nachversorgungsbedarf keling van nieuwe technologieën reduzieren können. die kunnen bijdragen tot een vermindering van risico’s, trauma, behandelingskosten, behandelings- duur en de noodzaak van nazorg.
  4. 4. mission va l u e s letter The growth and success of our organization is dependent upon the shared values of our people. We must learn, understand and live by a unified set of values that will guide us in a continually changing medical environment: Innovation • to provide our people with a strong under- standing of our mission and shared values Commitment • to think like our Quality customers and work hard on their behalf • to rely on one another, to treat each other • to pay relentless well and to put the Excellence attention to business development and fundamentals motivation of our people at the top Success • to bring a commitment of our priority lists to quality and a sense of urgency to • to encourage innova- everything we do tion, experimentation and risk-taking • to provide share- holders with an • to recognize bureau- attractive return cracy as an archenemy through sustained and not allow it to high-quality growth inhibit our good sense and creative spirit • to recognize and reward excellence by sharing Boston Scientific’s success with our employees
  5. 5. mission va l u e s letter The year 2000 was a challenging one for Boston Scientific. We continued to make progress integrating and consolidating the businesses we have acquired over the past several years. A wide range of organizational and managerial improvements were introduced as well, including the addition of a number of senior leaders who brought with them decades of collective experience. And our financial performance was sound. Yet there were also frustrations, principally with our coronary pete nicholas, stent pipeline. It continues to be clear that the chairman of the financial markets will not reward our overall board performance until we resolve the problems with our coronary stent program. We will address this issue — and our relationship with jim tobin, president our stent vendor Medinol — later in the letter. and chief executive officer In last year’s annual report, we told you we would remain focused on two critical themes in 2000: Innovation and Operational Excel- lence. Throughout the year, we focused intensely on these priorities, and the results have been encouraging.
  6. 6. mission va l u e s letter Early in the year, the management structure was In order to create an organization that can realigned to permit maximum emphasis on these efficiently convert innovative ideas into highly safe objectives. Corporate research and development, and effective new products, we have strengthened and regulatory and clinical affairs, were concentrated the processes, tools and core competencies in under Kshitij Mohan, Ph.D., Senior Vice President research and development, and regulatory and and Chief Technology Officer, and operations and clinical affairs. quality were centralized under Jim Taylor, Senior We have created a number of Centers of Technical Vice President of Corporate Operations. Both have Excellence and hired strong leaders to direct them. brought substantial change and improvement to their respective areas. • Robert Graziadei, M.D., was recruited to head a newly formed Center of Clinical Sciences that Innovation includes Mary Russell, M.D., who recently joined Boston Scientific is committed to driving growth us as head of Cardiovascular Clinical Affairs. through harnessing technological innovation both Worldwide clinical affairs is managed through in the near and long term. Our approach includes a the Center. mixture of tactical and strategic initiatives designed to provide sustainable growth through focusing on and • Eric Ankerud joined the company as the head of delivering the products currently in our pipeline as worldwide Regulatory Affairs. well as strengthening our product development processes and tools. In addition, we are committed to • Michael Helmus, Ph.D., was recruited to direct building a strong foundation of key scientific compe- a newly created Center for Material Sciences. tencies that underpin our products and technologies. Other newly established Centers include the Center Progress included FDA clearances on 37 products, CE for Process Technologies and the Center for Imaging marks on eight, and approval by the Japanese Ministry and Electronics. of Health and Welfare on 39. We also conducted nearly 50 clinical trials, filed 479 patent applications We believe that consolidating and strengthening and received 345 patents. Our commitment to tech- our focus and technical excellence in these areas will nological innovation was evidenced in our plans to enhance product development as well as provide for significantly increase our research and development successful integration of products and technologies spending in 2001. Progress continued during the first that we will continue to acquire through various two months of 2001, with six FDA approvals, four strategic alliances. CE marks and five approvals in Japan. Innovation for Boston Scientific has always meant Another promising program is our drug-coated combining internally developed products with those stent platform. In October we began clinical trials we have obtained externally, through our licensing in Germany on a Paclitaxel-coated stent after exten- and acquisition activities. Most successful innovation sive animal trials. Drug-coated stents show great programs represent a balance between organic and promise for lowering rates of restenosis. In addition acquired technology. to Paclitaxel as our first choice for a drug-coated We have recently created alliances with a number of stent, we are building a portfolio of drugs and companies as part of that strategy, including the carrier materials to develop the most advantageous following completed and pending acquisitions: drug/carrier/stent combinations for different indi- cations. We have also reinforced our portfolio of • Interventional Technologies, Inc., a manufacturer projects in the gastroenterology, endovascular of microsurgical devices for use in interventional and urology areas. cardiology. Its flagship product is the Cutting Balloon® catheter, a unique balloon angioplasty device that makes precise incisions in arterial
  7. 7. plaque during balloon inflation. This technology The plan began showing preliminary results only could serve as a platform for developing new ther- months after its implementation: apies for treating coronary artery disease. The • Supply chain initiatives have resulted in acquisition also adds sophisticated metallurgy improved inventory management, which technology to Boston Scientific’s portfolio. has reduced inventory levels and write-offs. • Embolic Protection, Inc., the developer of the In addition, our supplier management efforts Filterwire™ embolic protection device, which have reduced materials and services costs. captures embolic material dislodged during • Manufacturing process control improvements cardiovascular interventions. This acquisition are steadily raising production yields and manu- will allow Boston Scientific to accelerate its entry facturing efficiencies, improving quality and into the embolic protection market, one of the reducing costs. most promising new growth segments in inter- ventional medicine. • Scheduled transfers of production, aimed at optimizing our network of plants and better • Quanam Medical Corporation, a manufacturer allocating our resources through the creation of medical devices that specializes in drug-delivery of a more effective network of manufacturing stent systems. Quanam’s technology will help and R&D facilities, are on target for completion Boston Scientific broaden its drug-delivery port- by the end of 2001. folio with an additional implant-based technology and a family of proprietary biomaterials. Looking forward to 2001 and beyond, we are expanding our vision of improvement to include • Catheter Innovations, Inc., a manufacturer even shorter lead times and higher manufacturing of vascular access products. The acquisition of flexibility. Servicing our customers — from time this technology presents opportunities for appli- of order through receipt of product — will be the cations across other Boston Scientific product focus of improvements designed to make production lines and therapies. processes more robust and flexible, with reduced We would like to welcome the new members of the cycle times at all stages. Our customers will see the Boston Scientific team who are joining us as a result ultimate advantages of a more responsive organiza- of these acquisitions. tion that fully meets highest quality product supply needs and new product launch effectiveness. Our acquisition strategy will remain a fundamental part of our innovation program as we continue to Thanks to our employees, implementation of investigate opportunities that will keep our new the global operations plan is proceeding smoothly, product pipeline full and diversified. and we are on schedule to achieve our projected improvements, technology transfers and resulting Operational Excellence savings. The plan is forward-looking and makes clear Joint progress on Innovation and Operational that innovation is our future and that we’re creating Excellence was embodied in the global operations the opportunity to make the added investments plan we announced in July. The plan increases needed to support that innovation. It represents a productivity by creating greater operational efficien- thoughtful and thorough analysis and projection of cies and generating savings, allowing the company to the strategic needs of the company. increase its ability to invest in research and develop- ment. The plan is estimated to achieve net, pre-tax While implementation is going well, job dislocation operating savings of $250 million on an annualized was an unavoidable aspect of the plan, and we want basis beginning in 2003 by improving supply chain to again acknowledge and thank all our affected effectiveness, strengthening manufacturing process employees for their dedication and continuing control and optimizing our network of plants. contributions during this transition period.
  8. 8. mission va l u e s letter develop and position its existing, emerging and Strengthening Our Team future technologies. The global operations plan is part of a series of measures undertaken during the year to intensify our • Dennis Ocwieja was named Vice President of focus on Innovation and Operational Excellence. Quality and is responsible for establishing a In addition to the responsibilities consolidated under common quality system throughout the company. Kshitij Mohan and Jim Taylor, a number of other appointments and promotions were made to • Paul Donovan was named Vice President of strengthen the team. Corporate Communications, responsible for employee communications, corporate identity • Steve Moreci was appointed to the newly created and media relations. position of Senior Vice President and Group President for Endosurgery. Under this new group All these new people and positions speak to the structure, Steve will oversee three divisions: Medi- company’s ongoing commitment to its entrepre- tech, Microvasive Endoscopy and Microvasive neurial spirit and risk-taking culture. Like most Urology. successful organizations, we are constantly looking to change, adapt and improve in ways that value • Paul LaViolette, Senior Vice President and unconventional thinking, bold action and original Group President for Cardiovascular, assumed solutions. From the beginning, we have known that management responsibility for three divisions: agility, flexibility and creativity have been — and EP Technologies, Scimed and Target. He continues will remain — the hallmarks of our success. to lead our international business and oversee Corporate Marketing and Corporate Sales. We also strengthened our team by investing in our people. We made significant improvements in our • Fred Colen was named Senior Vice President employee training and development programs. for Cardiovascular Technology, responsible We also improved our vacation policy for all U.S. for worldwide cardiovascular research and employees, and we continued to enhance the com- development. pany contribution to the 401(k) retirement program. Finally, through the introduction of the Performance • Mark Stautberg was named Senior Vice President Achievement and Development Review (PADR) system, for Sales at Scimed, responsible for the new we strengthened our commitment to a compensation cardiovascular sales organization, which serves program that recognizes individual accomplishment. interventional cardiologists, radiologists and vascular surgeons who treat coronary disease and Noteworthy peripheral vascular disease. A number of other events and activities are worth noting. • Four division presidents were named: Jim Feenstra, Target; Dave McClellan, Medi-tech; • Overall, we remained highly profitable, and we John Pedersen, Microvasive Urology; and Mike continued to pay down debt rapidly. By reducing Phalen, Microvasive Endoscopy. debt we strengthened our ability to fund new acquisitions and strategic alliances. • Michael Glynn was named General Manager for Asia Pacific. He leads a strong team that was • Our facilities in Ireland performed well in both distinguished by several promotions including output and productivity, with plans for more pro- Mike Daly, General Manager for Australia; Lim duct transfers and employment increases this year. Poh Lin, Group Marketing Manager for Korea; and Sang Yi, Vice President for North Asia • Boston Scientific Japan again showed itself to Business. be a leader both within the company and in the industry at large. In an environment of increasing • Art Rosenthal, Ph.D., was appointed Chief competition and reimbursement reduction, BSJ Scientific Officer and is working with physicians and the scientific community to help the company
  9. 9. grew faster than its markets and increased market Looking ahead leadership in all critical franchises in the world’s Throughout this past year — as throughout others — second largest health care market. we have been guided by our core values. While our execution has not always been flawless, it has always • The Boston Scientific team performed superbly been — and will always be — informed by our best during the year. Particularly impressive was the instincts. As we look ahead, we want to rededicate ability of the sales and marketing teams around ourselves to living up to those values. They define the world to maintain and strengthen leadership us as a company and as individuals. They motivate positions in most of our markets in the face of our mission, our work and our actions. stiff competition. In the coming year we will maintain our focus on • We reached an agreement with Guidant Innovation and Operational Excellence. We will carry Corporation to settle all outstanding litigation, the momentum of the improvements and achieve- which consisted of a number of lawsuits in the ments of the past year into 2001. The changes we U.S. and Europe in which each had accused the have put in place have begun to show results and other of patent infringement. will show even more in the future. • While a jury ruled in our favor on five of six Above all, we will continue to provide our customers claims in a patent infringement dispute with the most innovative and effective products and tech- Johnson & Johnson, J&J was awarded a $324 nologies that help them deliver the highest quality million verdict based on one finding of infringe- care to their patients. For all of you who have joined ment. We disagree with this finding, and we us in this endeavor, we thank you for your support believe the verdict is excessive, but it is not the and welcome your partnership as we continue final word. Several additional legal stages remain our journey. to be played out, and we believe in the end the lone finding of infringement will not stand. Respectfully, • We remained active in the public policy arena, adding our voice to the national and inter- national dialogue on issues affecting our industry, particularly those involving the develop- ment of technology and the delivery of health care. We will continue to contribute to the debate Jim Tobin Pete Nicholas on these issues, advocating sound policies and President and Chief Chairman of the Board appropriate reforms on regulation, reimburse- Executive Officer ment, international trade, harmonization of global regulatory standards, funding for scientific research and other important issues. • As has been reported elsewhere, our relationship with Medinol remains unresolved at this writing. We have been engaged in negotiations to acquire them, but the process has taken longer than we had anticipated. While we hope to reach an agreement, we are proceeding aggressively with our own stent development program. The rapid pace of innova- tion in the coronary stent market demands that we resolve our relationship with Medinol one way or another, and we are committed to doing so.
  10. 10. leadership i n n o va t i o n healing We are focused 14,000 employees • 15 technology centers • direct marketing and sales operations in 40 countries • specialties: cardiology, electrophysiology, endoscopy, endourology, specialties: electrophysiology, endoscopy, endourology, interventional cardiology, interventional neuroradiology, interventional neuroradiology, surgical oncology interventional radiology, oncology, vascular surgery
  11. 11. ...on advancing less invasive medicine to its fullest potential. No company has been bolder in pushing the boundaries of discovery and exploring better therapies for patients. No company can match our global reach, or our breadth and depth of products across such a wide range of medical specialties. No one has more talented and capable people inspired by shared values and an unwavering mission. A Leading Role in the Less Invasive Medical Device Market others Boston Scientific has boston scientific 23% 27 % remained the undisputed leader in less invasive medicine since it pioneered this field. tyco/mallinckrodt Leadership of such duration 3% comes from a sustained cook, inc. willingness to take risks, 3% literally creating new markets. Our research philosophy c.r. bard focuses not only on developing 7% products that strengthen our guidant medtronic 12% presence in the markets we 9% serve but on finding solutions 16% that meet diverse and complex johnson & johnson patient needs. Source: IMS Health projections for the four quarters ending September 30, 2000.
  12. 12. leadership i n n o va t i o n healing We are determined 37 new products cleared by the fda • 345 u.s. patents issued • 479 u.s. patent applications filed
  13. 13. continue to create new tech- nologies and products that save and improve lives. This is both our heritage and our future. By combining the best people and practices with the insights of the world’s leading physicians, we will take innovation to an even higher level. Our collaboration with our physician partners will help develop even more new therapies, provide even better care and make it possible for even more people to lead active and fulfilling lives. Leading through technology Boston Scientific’s leadership is tied closely to its many technology innovations, resulting in new products and ongoing product improvements, as the following examples illustrate: The Atlantis™ SR IVUS (intravas- Our new NIRoyal™ Elite Monorail™ The GDC® SynerG™ Detachment cular ultrasound) imaging catheter Stent System represents our most System is used in treating brain brings new capabilities to the diagnosis advanced stent placement system. It aneurysms. The latest improvements of coronary artery disease. It is the combines several of our most current in the Guglielmi Detachable Coil only commercially available 40MHz and innovative technologies in one focus on making it possible to detach IVUS catheter compatible with product, providing excellent stent a coil more accurately, efficiently smaller, increasingly popular 6 visualization, vessel support and and consistently. French guiding catheters, and its ease of delivery. high frequency makes images easier to read.
  14. 14. leadership i n n o va t i o n healing We are committed less invasive surgery impacts quality of life: faster recovery time • fewer complications • less trauma • quicker return to normal activities
  15. 15. improving the quality of life for patients, their families and loved ones. We are passionate about our work because we know we make a difference in countless lives. We come from many cultures. We live in many countries. We speak many languages. Yet we are united by one belief: that together we can change health care for the better, not just for a few patients, but for thousands around the world. In the end, it all comes down to people. “It’s clear from all aspects — administrative, engineering, “Boston Scientific’s products are without peer. They are sales and marketing — that Boston Scientific’s primary focus innovative and ergonomically well designed with a lot of is on patients. It’s clear in everything they do. One of the best physician input, and they’re a clear leader in the marriage things about working with Boston Scientific is that they bring of coatings and devices. It’s a company of great integrity.” the development engineers to the table early on to work with Dr. Joseph Macaluso the docs who will use their products. No other company does Managing Director it like Boston Scientific.” The Urologic Institute of New Orleans Dr. Douglas Coldwell Interventional Radiologist Good Samaritan Hospital, Phoenix
  16. 16. boston scientific Approximately 9,000p 75,000 U.S. patients had Medi-tech artnering urologists venous access products implanted Approximately 130,000 new cases per year of colon cancer are diagnosed in the U.S. 8,000 Over 75,000 partnering interventional radiologists aneurysms treated worldwide with the GDC® coil Approximately 100,000procedures performed in the U.S. using EPT products 750,000pati ents treated worldwide using Scimed balloon catheters Over 250,000pat ients worldwide Approximately have advanced coronary artery disease 8,000p artnering vascular surgeons Approximately 9,000p artnering gastroenterologists 1,700,000 angioplasty procedures performed worldwide using Scimed products Over 1,000,000 cases per year of primary liver cancers diagnosed worldwide 1,100,000 new and recurrent cases of coronary attack occur each year in the U.S. Over 805,000 procedures for stone management performed worldwide using Microvasive products Over 90,000 Approximately 1,000 venous access procedures for infusion therapies and hemodialysis performed worldwide using partnering interventional Medi-tech Vaxcel™ products neuroradiologists and neurosurgeons
  17. 17. for the year 2000 boston scientific and subsidiaries Consolidated Financial Statements Financial Table of Contents management’s discussion and analysis of financial condition and results of operations . . . .f-2 consolidated statements of operations . . . . . . . . .f-13 consolidated balance sheets . . . . . . . . . . . . . . . . . .f-14 consolidated statements of stockholders’ equity . .f-16 consolidated statements of cash flows . . . . . . . . .f-17 notes to consolidated financial statements . . . . . .f-18 report of independent auditors . . . . . . . . . . . . . . .f-42 five-year selected financial data . . . . . . . . . . . . . .f-43 quarterly results of operations . . . . . . . . . . . . . . .f-44 market for the company’s common stock and related matters . . . . . . . . . . . . . . . . . . . . . . . . .f-45 boston scientific and subsidiaries f-1
  18. 18. Management’s Discussion and Analysis of Financial Condition and Results of Operations Gross profit as a percentage of net sales increased from Results of Operations 65.3% in 1999 to 68.8% in 2000. The improvement Years Ended December 31, 2000 and 1999 in gross margin in 2000 is due primarily to the Net sales for the year ended December 31, 2000 were recording of a pre-tax provision of $62 million for $2,664 million as compared to $2,842 million in excess NIR® stent inventories and purchase commit- 1999, a decline of 6 percent. Net sales were adversely ments during the third quarter of 1999. The improve- affected by approximately $30 million arising from ment is also due to benefits that the Company realized foreign currency fluctuations compared to the prior through its increased ability to better manage inventory year. Net income for 2000 was $373 million, or and lower product costs, partially offset by a shift in $0.91 per share (diluted), as compared to net income the Company’s product sales mix. for 1999 of $371 million, or $0.90 per share. The Company’s new stent systems launched in the United States (U.S.) revenues decreased approximately U.S. in the first quarter of 2001 will negatively impact 9% to $1,577 million during 2000, while interna- gross margins because the systems include more tional revenues decreased approximately 1% to $1,087 expensive gold-coated stents with higher costing delivery million. The decrease in worldwide sales was princi- systems. Further, the Company’s ability to effectively pally attributable to a decline in the Company’s sales manage its mix and levels of inventory, including con- of coronary stents and balloons, primarily in the U.S. signment inventory, as the Company transitions to Worldwide coronary stent revenues and worldwide new products will be critical in minimizing excess coronary balloon revenues were approximately $427 inventories. million and $357 million, respectively, during 2000, Medinol Ltd. (Medinol), an Israeli company, is the compared to $604 million and $429 million, respec- supplier of the NIR® coronary stent. Any unforeseen tively, during 1999. delays, stoppages or interruptions in the supply The worldwide coronary stent market is dynamic and and/or mix of NIR® stent inventory could adversely highly competitive, with significant market share affect the operating results and/or revenues of the volatility. In addition, technology and competitive Company. Generally, the Company has less control offerings in the market are constantly changing. over inventory manufactured by third parties as The Company’s reduction in coronary stent revenues compared to inventory manufactured internally. during 2000 reflects this volatility. The decline in Furthermore, the purchase price of NIR® coronary balloon revenues during 2000 results from new prod- stents, the amount of NIR® coronary stent sales as a uct offerings by the Company’s competitors as well as percentage of worldwide sales and the mix of coronary a trend towards fewer balloons being used in stent stent platforms could significantly impact gross mar- procedures. In early 2001, the Company received gins. As average selling prices for the NIR® stents fluc- approval from the U.S. Food and Drug Administra- tuate, the Company’s cost to purchase the stents will tion to market four NIR ® coronary stent systems as change, because cost is based on a constant percentage well as its Maverick® balloon dilatation catheter in the of average selling prices. Therefore, if higher-costing U.S. The Company believes the launch of these new NIR® stents are being sold as average selling prices are products will enable the Company to remain compet- declining, gross margins could be negatively impacted. itive in these markets. However, stent revenues for At December 31, 2000, the Company had approxi- 2001 will be impacted by continued volatility in the mately $149 million of net NIR® coronary stent inven- worldwide coronary stent market, product develop- tory and was committed to purchase approximately ment and the timing of submission for and receipt of $32 million of NIR® stents from Medinol. Worldwide regulatory approvals to market next generation coro- NIR® coronary stent sales as a percentage of worldwide nary and peripheral stent platforms in the U.S. and sales were approximately 15% in 2000 compared to international markets. All of these factors could also approximately 20% in 1999. The Company’s relation- negatively impact the Company’s ability to transition ship with Medinol has been contentious, and the to new products and to continue to offer competitive Company’s ability to manage its relationship with stent products. Stent revenues for 2001 may be nega- Medinol could impact the future operating results of tively impacted by a reduction in average selling prices the Company. due to competitive pressures. f-2 boston scientific and subsidiaries
  19. 19. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) During the third quarter of 2000, the Company the Company expects to make during 2001 with the approved and committed to a global operations plan remainder being primarily severance costs for employees which encompasses a series of strategic initiatives to terminated during 2001 but paid out in 2001 and increase productivity and enhance innovation. The 2002. The Company anticipates that these cash out- plan includes manufacturing process and supply chain lays will be funded from cash flows from operating programs and a plant optimization initiative. The activities and from the Company’s borrowing capacity. manufacturing process and supply chain programs The cash outlays include severance and outplacement are designed to lower inventory levels and the cost of costs, transition costs and capital expenditures related manufacturing and to minimize inventory write- to the plan. The success of the initiative may be downs. Gross margin benefits will not be fully realized dependent on the Company’s ability to retain existing until manufacturing processes are improved and his- employees and attract new employees during the tran- torical inventories are sold. sition period. The intent of the plant optimization initiative is to The Company estimates that the global operations better allocate the Company’s resources by creating a plan will achieve pre-tax operating savings, relative to more effective network of manufacturing and research the base year of 1999, of approximately $100 million and development facilities. It will consolidate manu- in 2001, $220 million in 2002 and $250 million in facturing operations along product lines and shift sig- annualized savings thereafter. Incremental pre-tax nificant amounts of production to Company facilities savings expected to be realized in 2001 relative to in Miami and Ireland and to contract manufacturing. 2000 are estimated to be approximately $30 million. The Company’s plan includes the discontinuation These savings will be realized primarily as reduced cost of manufacturing activities at two facilities in the U.S. of sales and are expected to help mitigate gross margin and the closure of a third facility. The Company pressures resulting from the launch of higher costing expects that the plan will be substantially completed stents and stent delivery systems. Additionally, the over the next twelve months. During 2000, the Com- Company intends to use a portion of these savings, pany recorded a pre-tax special charge of approximately when generated, to increase its investment in research $58 million associated with the plant optimization and development. initiative. The charge relates to severance and outplace- Selling, general and administrative expenses as a ment costs for the approximately 1,950 manufacturing, percentage of sales increased from 30% of sales in manufacturing support and management employees 1999 to 33% in 2000 and increased approximately who are expected to be affected by the plan over the $25 million from 1999 to $867 million. The increase next twelve months. Less than $1 million had been in expenses as a percentage of sales in 2000 is prima- charged against the related accrual for the approximately rily attributable to the reduction in sales combined 10 employees terminated pursuant to the plan as of with an increase in costs incurred to strengthen and December 31, 2000. In addition, during 2000, the retain the Company’s field sales force and to expand Company recorded pre-tax costs of $11 million as cost its direct sales presence in international regions. The of sales related to transition costs associated with the Company’s ability to retain its established sales force plant optimization plan and accelerated depreciation may impact the operating results of the Company. on fixed assets whose useful lives have been reduced as a result of the initiative. During 2001, the Company Amortization expense remained at approximately estimates that it will record pre-tax expenses of 3% of net sales while decreasing 1% from $92 million approximately $70 million as cost of sales related in 1999 to $91 million in 2000. to the plant optimization initiative, primarily for transition costs, accelerated depreciation and Royalties decreased approximately 20% from $46 mil- abnormal production variances related to under- lion in 1999 to $37 million in 2000. The reduction utilized plant capacity. in royalties is primarily due to non-recurring expenses of approximately $7 million recorded during 1999. The Company expects that it will make total cash The Company continues to enter into strategic tech- outlays, net of proceeds from building and fixed nological alliances, some of which include royalty asset sales, of approximately $115 million for the plant commitments. optimization initiative, $85 million of which boston scientific and subsidiaries f-3
  20. 20. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Research and development expenses remained at in the U.S. has also resulted in more complex billing approximately 7% of net sales while increasing 1% and collection procedures. The Company’s ability to from $197 million in 1999 to $199 million in 2000. react effectively to the changing environment may The investment in research and development dollars impact its bad debt and sales allowances in the future. reflects spending on new product development pro- Further, the U.S. marketplace is increasingly charac- grams as well as regulatory compliance and clinical terized by consolidation among health care providers research. The Company continues to be committed and purchasers of medical devices that prefer to limit to refining existing products and procedures and to the number of suppliers from which they purchase developing new technologies that can reduce risk, medical products. There can be no assurance that trauma, cost, procedure time and the need for after- these entities will continue to purchase products from care. In 2001, the Company expects to increase its the Company. investment in research and development over 2000 International markets are also being affected by eco- levels to fund the development of new products and nomic pressure to contain reimbursement levels and clinical trials, including the Company’s drug-coated health care costs. The Company’s ability to benefit stent program, the carotid program and an internally from its international expansion may be limited by developed stent platform. Additionally, the Company risks and uncertainties related to economic conditions plans to expand its research and development teams to in these regions, regulatory and reimbursement enhance the Company’s product development, clinical approvals, competitive offerings, infrastructure devel- affairs and regulatory compliance capabilities in 2001 opment, rights to intellectual property and the ability and beyond. of the Company to implement its overall business Interest expense decreased from $118 million in 1999 strategy. Any significant changes in the competitive, to $70 million in 2000. The overall decrease in inter- political, regulatory or economic environment where est expense is primarily attributable to a lower average the Company conducts international operations may debt balance. Other income (expense), net, changed have a material impact on revenues and profits, espe- from expense of approximately $9 million in 1999 cially in Japan given its high profitability relative to income of approximately $17 million in 2000. to its contribution to revenues. Deterioration in the The change is primarily due to an increase in net gains Japanese and/or emerging markets economies may recognized on sales of available-for-sale securities impact the Company’s ability to grow its business and and to an increase in gains on derivative financial to collect its accounts receivable. Additionally, the instruments. trend in countries around the world toward more stringent regulatory requirements for product clear- The Company’s effective tax rate, including the impact ance and more vigorous enforcement activities has of restructuring-related charges and credits, decreased generally caused or may cause medical device manu- from 34% in 1999 to 29% in 2000. Excluding the facturers to experience more uncertainty, greater risk impact of restructuring-related charges and credits, and higher expenses. These factors may impact the rate the Company’s effective tax rate decreased from 34% at which Boston Scientific can grow. In addition, the in 1999 to 30% in 2000. The decrease is primarily impact of selling higher costing stents, the cost of attributable to a shift in the mix of the Company’s maintaining the Company’s sales force and increasing U.S. and international businesses. Management cur- its investment in research and development is expected rently estimates that the 2001 effective tax rate will to result in lower operating margins for 2001. remain at approximately 30%. However, the effective However, management believes that it is positioning tax rate could be negatively impacted by acquisitions of the Company to take advantage of opportunities that businesses contemplated by the Company in 2001. exist in the markets it serves. Uncertainty remains with regard to future changes within the health care industry. The trend toward managed care and economically motivated and more sophisticated buyers in the U.S. may result in continued pressure on selling prices of certain products and resulting compression on gross margins. In addition to impacting selling prices, the trend to managed care f-4 boston scientific and subsidiaries
  21. 21. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Years Ended December 31, 1999 and 1998 Selling, general and administrative expenses as a per- Net sales increased 27% in 1999 to $2,842 million as centage of sales decreased from 34% of sales in 1998 to compared to $2,234 million in 1998. The 1999 30% of sales in 1999 and increased approximately $87 results include the operations of Schneider Worldwide million from 1998 to $842 million. The decrease as a (Schneider), which was acquired in the third quarter percentage of sales is primarily attributable to the of 1998. On a pro forma basis, assuming Schneider increase in sales due to the launch of coronary stents revenues had been included in all of 1998, net sales in the U.S. and Japan, the realization of synergies as in 1999 increased approximately 14%. Net income the Company integrated Schneider into its organiza- for 1999 was $371 million or $0.90 per share (diluted) tion, and improved returns in Asia Pacific and Latin as compared to a reported net loss for 1998 of America as the Company continued to leverage its $264 million, or $0.68 per share, including direct sales infrastructure. The increase in expense merger-related charges and credits of $667 million dollars is primarily attributable to higher selling ($527 million, net of tax). expenses as a result of the launch of coronary stents in the U.S., increased costs to expand the Company’s U.S. revenues increased approximately 25% to $1,741 direct sales presence in Asia Pacific and Latin America, million during 1999, while international revenues and increased legal expenses. increased approximately 31% to $1,101 million. Without the impact of foreign currency exchange rates Amortization expense increased from $53 million on translation of international revenues, worldwide in 1998 to $92 million in 1999 and increased as a sales for 1999 increased approximately 25%. The percentage of sales from 2% to 3%. The increase is increase in sales was primarily attributable to the primarily a result of the amortization of intangibles inclusion of Schneider sales for the entire year and related to the purchase of Schneider. the Company’s sales of coronary stents in the U.S. Royalty expense increased approximately 48% from and Japan. U.S. coronary stent revenues and world- $31 million in 1998 to $46 million in 1999. The wide coronary stent revenues, primarily sales of the increase in royalties is primarily due to royalty obliga- NIR® stent, were approximately $409 million and tions assumed in connection with the Schneider $604 million, respectively, during 1999, compared acquisition and payments made to Medinol on sales to $211 million and $324 million, respectively, during of internally developed stent platforms. 1998. Worldwide NIR® coronary stent sales as a percentage of worldwide sales were approximately 20% Research and development expenses decreased as in 1999 compared to approximately 13% in 1998. a percentage of sales from 9% in 1998 to 7% in 1999. Research and development expenses were $200 mil- Gross profit as a percentage of net sales decreased lion in 1998 and $197 million in 1999. The decrease from 67.1% in 1998 to 65.3% in 1999. The decrease as a percentage of sales is primarily attributable to the in gross margin is primarily due to a provision recorded launch of coronary stents in the U.S. and Japan and in the third quarter of 1999 of $62 million for excess the realization of synergies in connection with the NIR® stent inventories and purchase commitments. Schneider acquisition. The excess position was driven primarily by a shortfall in planned third-quarter NIR® stent revenues, a During 1999, the Company identified and reversed reduction in NIR® stent sales forecasted for 1999 and restructuring and merger-related charges of $10 million 2000, and strategic decisions regarding versions of no longer deemed necessary. These amounts related the NIR® stent system to be launched. In the third primarily to the restructuring charges accrued in the quarter of 1998, the Company provided $31 million fourth quarter of 1998 and reflect the reclassification for costs associated with the Company’s decision to of assets from held-for-disposal to held-for-use recall voluntarily the NIR ON® RangerTM with SoxTM resulting from management’s decision to resume a coronary stent system in the U.S. Excluding these development program previously planned to be elimi- charges, gross margins were 67.5% and 68.1% for nated. In addition, estimated severance costs for 1998 1999 and 1998, respectively. Gross margins during initiatives were reduced as a result of attrition. During 1999 were positively impacted compared to 1998 by a 1998, the Company recorded merger-related charges reduction in other inventory charges. However, the and credits of $667 million ($527 million, net of tax) reduction was offset by a decrease in average selling primarily related to purchased research and develop- prices and increased manufacturing costs. ment acquired in the $2.1 billion cash purchase of boston scientific and subsidiaries f-5
  22. 22. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Schneider. On September 10, 1998, the Company native future uses. Accordingly, the value attributable consummated its acquisition of Schneider, formerly to these projects was immediately expensed at acquisi- a member of the Medical Technology Group of Pfizer tion. If the projects are not successful or completed in Inc. The acquisition was accounted for using the a timely manner, the Company may not realize the purchase method of accounting. The consolidated financial benefits expected for these projects. financial statements include Schneider’s operating The income approach was used to establish the fair results from the date of acquisition. values of the purchased research and development. The aggregate purchase price of the Schneider acqui- This approach established the fair value of an asset sition has been allocated to the assets acquired and by estimating the after-tax cash flows attributable liabilities assumed based on their estimated fair values to the in-process project over its useful life and then at the date of acquisition. The estimated excess of pur- discounting these after-tax cash flows back to a present chase price over the fair value of the net tangible assets value. Revenue estimates were based on estimates of acquired was allocated to specific intangible asset cate- relevant market sizes, expected market growth rates, gories with the remainder assigned to excess of cost expected trends in technology and expected product over net assets acquired. At December 31, 2000, the introductions by competitors. In arriving at the value net intangibles recorded in connection with the of the in-process research and development projects, Schneider acquisition, including the excess of cost the Company considered, among other factors, the over net assets acquired, represented 39% and 70% of in-process project’s stage of completion, the complexity the Company’s total assets and stockholders’ equity, of the work completed as of the acquisition date, the respectively. Core technology, developed technology, costs already incurred, the projected costs to com- assembled workforce, trademarks and patents are plete, the contribution of core technologies and other being amortized on a straight-line basis over periods acquired assets, the expected introduction date, and ranging from 9 to 25 years. The Company is amortiz- the estimated useful life of the technology. The dis- ing the value assigned to customer lists (relationships) count rate used to arrive at a present value as of the over 25 years because it has been the Company’s date of acquisition was based on the time value of experience that physician and hospital relationships money and medical technology investment risk are built for the long term and fundamental to the factors. For the Schneider purchased research and Company’s business of bringing innovative products development programs, a risk-adjusted discount rate to market. The Company realizes that maintaining of 28% was utilized to discount the projected cash these and similar relationships will require ongoing flows. The Company believes that the estimated efforts. However, both Schneider and the Company purchased research and development amounts so have over a 20-year history of working closely with determined represent the fair value at the date of interventionalists and their institutions for both vas- acquisition and do not exceed the amount a third party cular and nonvascular applications, and management would pay for the projects. believes these relationships will continue to benefit the The most significant Schneider purchased research Company. In addition, after considering the long- and development projects that were in-process at term prospects for the less invasive medical device the date of acquisition were brachytherapy, devices industry and the fundamental role of catheter-based for aneurysmal disease and coronary stents, which interventional medicine, as well as Schneider’s com- represented approximately 26%, 20% and 16% of the petitive position within the industry, management in-process value, respectively. Set forth below are concluded that it is appropriate to amortize the excess descriptions of these in-process projects, including of the Schneider purchase price over the fair value of their status at the end of 2000. the assets acquired over 40 years. Finally, the Company recorded a $671 million ($524 million, net The brachytherapy system is an intravascular radiation of tax) charge to account for purchased research and system designed to reduce clinical restenosis after development. The valuation of purchased research and a balloon angioplasty and/or a stent procedure. The development, for which management is primarily system consists of a computer-controlled afterloader, responsible, represents the estimated fair value at the beta radiation source, centering catheter, source date of acquisition related to in-process projects. As of delivery wire and dummy wire. As of the date of acqui- the date of acquisition, the in-process projects had not sition, the project was expected to be completed and yet reached technological feasibility and had no alter- the products commercially available in the U.S. within f-6 boston scientific and subsidiaries
  23. 23. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) two to three years, with an estimated cost to complete approximately $62 million, most of which represented of approximately $5 million to $10 million. severance and related costs. Approximately $36 mil- lion of the total was capitalized as part of the purchase The aneurysmal disease projects are endoluminal price of Schneider. The remaining $26 million was grafts for the treatment of late stage vascular aneurysms charged to operations during 1998. In addition, as and occlusions. The most significant of the projects part of the Schneider acquisition, the Company capi- in this category at the date of acquisition was the endo- talized estimated costs of approximately $16 million luminal graft for the treatment of abdominal aortic to cancel Schneider’s contractual obligations, primarily aneurysms. As of the date of acquisition, the projects with its distributors. were expected to be completed and the products commercially available in the U.S. within two to three The Company substantially completed its rationaliza- years, with an estimated cost to complete of approxi- tion plan in 1999, including the closure of five mately $10 million to $15 million. Schneider facilities as well as the transition of manu- facturing for selected Boston Scientific product lines Coronary stent systems underway at the date of acqui- to different sites. Approximately 1,800 positions were sition were stent systems for native coronary artery eliminated (resulting in the termination of approxi- disease, saphenous vein graft disease, and versions with mately 1,500 employees) in connection with the novel delivery systems. The Company believes that the rationalization plan, and the anticipated cost savings stent systems will be especially helpful in the treatment have been achieved. As noted previously, in the third of saphenous vein graft disease. As of the date of quarter of 1999, the Company identified and reversed acquisition, the projects were expected to be completed restructuring and merger-related charges of $10 mil- and the products commercially available for sale in the lion no longer deemed necessary. During 1999, the U.S. within one year with an estimated cost to com- costs related to the transition of manufacturing plete of approximately $1 million to $3 million. operations were not significant and were recognized in operations as incurred. In the second quarter of 2000, the brachytherapy project was discontinued due to system performance The 1998 rationalization plan also resulted in the issues. However, the Company recently outsourced decision to expand, not close, the Target Thera- this project to a third party in which it holds a minority peutics, Inc. (Target) facilities originally provided for interest. As part of a subsequent project consolidation in a 1997 merger-related charge and to relocate other program, the Schneider abdominal aortic aneurysm product lines to those Target facilities. In the fourth project has been integrated with another internal quarter of 1998, the Company reversed $21 million of project. As a result, the Company will pursue the previously recorded merger-related charges, of which development of next-generation products for aortic $4 million related to facility costs and which also aneurysmal disease with an integrated platform while included reductions for revisions of estimates relating minimizing duplicative research and development. to contractual commitment payments, associated legal The cost of the development is still estimated to be in costs and other asset write-downs originally provided the range of approximately $10 million to $15 million. for as a 1997 merger-related charge. The coronary stent projects have been completed. In the second quarter of 1998, the Company realigned During 1998, the Company established a rationaliza- its operating units and decided to operate Target inde- tion plan in conjunction with the consummation of pendently instead of as a part of its vascular division the Schneider acquisition, taking into consideration as was planned at the date of the Target acquisition. duplicate capacity as well as opportunities for further Management believed that an independent Target leveraging of cost and technology platforms. The would allow the business unit to develop its technolo- Company’s actions, approved and committed to in gies and markets more effectively than it would as part the fourth quarter of 1998, included the planned of the vascular division. As a result of this decision, displacement of approximately 2,000 positions, over the Company reversed $20 million of 1997 Target half of which were manufacturing positions and would merger-related charges primarily related to revised result in annualized cost savings of approximately estimates for costs of workforce reductions and costs $50 million to $75 million. During the fourth quarter of canceling contractual commitments. In addition, of 1998, the Company estimated the costs associated the Company recorded purchased research and with these activities, excluding transition costs, to be development of approximately $11 million in connection boston scientific and subsidiaries f-7
  24. 24. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) with another acquisition consummated during 1998, at December 31, 2000, and 1999, respectively, at and, in the fourth quarter of 1998, the Company weighted-average interest rates of 8.00% and 6.70%, recorded $30 million of year-end adjustments related respectively. In addition, the Company had approxi- primarily to write-downs of assets no longer deemed mately $187 million and $421 million in revolving to be strategic. The assets related primarily to inventory, credit facility borrowings outstanding at December 31, long-lived and intangible assets that the Company did 2000 and 1999, respectively, at weighted-average not believe would be sold or realized, respectively, interest rates of 4.54% and 6.66%, respectively. because of revisions to and terminations of strategic At December 31, 2000, the revolving credit facilities alliances. The provisions were recorded as costs of totaled $1.65 billion, consisting of a $1.0 billion credit sales ($12 million), selling, general and administrative facility that terminates in June 2002, a $600 million expenses ($12 million), amortization expenses 364-day credit facility that terminates in September ($2 million), royalties ($2 million), research and 2001 and a $50 million uncommitted credit facility. development expenses ($1 million) and other expenses The revolving credit facilities also support the Com- ($1 million). pany’s commercial paper borrowings. Use of the borrowings is unrestricted and the borrowings are Interest expense increased from $68 million in 1998 unsecured. The revolving credit facilities require the to $118 million in 1999. The overall increase in Company to maintain a specific ratio of consolidated interest expense was primarily attributable to a higher funded debt (as defined) to consolidated net worth average outstanding debt balance borrowed in con- (as defined) plus consolidated funded debt of less than junction with the Schneider acquisition. or equal to 60%. As of December 31, 2000, the ratio was approximately 26%. The Company’s effective tax rate, including the impact of merger-related charges and credits, was approxi- The Company has the ability to refinance a portion mately 4% in 1998 and 34% in 1999. The Company’s of its short-term debt on a long-term basis through pro-forma effective tax rate, excluding the impact of its revolving credit facilities. The Company does merger-related charges and credits, increased from not expect that its short-term borrowings as of December approximately 33% in 1998 to 34% in 1999. The 31, 2000, will remain outstanding beyond the next increase is primarily attributable to a shift in the mix twelve months and, accordingly, the Company has not of the Company’s U.S. and international business. reclassified any of the short-term borrowings as long- term at December 31, 2000, compared to $108 million of such reclassifications at December 31, 1999. Liquidity and Capital Resources In March 1998, the Company issued $500 million of seven-year senior notes. The senior notes bear a Cash and short-term investments totaled $60 million coupon of 6.625% payable semi-annually, and are not at December 31, 2000, compared to $78 million redeemable prior to maturity or subject to any sinking at December 31, 1999. The Company had $173 mil- fund requirements. lion of working capital at December 31, 2000 as com- pared to current assets equaling current liabilities at The Company had 6.0 billion Japanese yen (translated December 31, 1999. The increase in working capital is to approximately $53 million and $58 million primarily due to the repayment of approximately $340 at December 31, 2000 and 1999, respectively) of million of short-term debt obligations using the borrowings outstanding with a syndicate of Japanese Company’s cash flows from operations, partially offset banks. The interest rate on the borrowings is 2.37% by changes in other working capital accounts. Cash and the borrowings are payable in 2002. In addition, proceeds during 2000 were generated primarily from the Company had approximately 1.1 billion Japanese operating activities. Cash proceeds during the period yen (translated to approximately $9 million) and 1.2 were partially offset by the repayment of approximately billion Japanese yen (translated to approximately $12 $447 million of outstanding short-term and long- million) of borrowings outstanding from a Japanese term debt obligations and purchases of the Company’s bank used to finance a facility construction project common stock of approximately $222 million. at December 31, 2000, and 1999, respectively. The interest rate on the borrowings is 2.1% and principal The Company had approximately $56 million and payments are due semi-annually through 2012. $277 million of commercial paper outstanding f-8 boston scientific and subsidiaries
  25. 25. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) The Company has uncommitted Japanese credit facil- On February 15, 2001, the Company announced the ities with several Japanese banks, which provided for signing of a definitive agreement to acquire borrowings and promissory notes discounting of up to Interventional Technologies, Inc (IVT). IVT develops, 15.0 billion Japanese yen (translated to approximately manufactures and markets minimally invasive devices $131 million) and 11.5 billion Japanese yen (translated for use in interventional cardiology, including the Cutting BalloonTM catheter and the Infiltrator® trans- to approximately $112 million) at December 31, 2000 and 1999, respectively. There was $12 million in bor- luminal drug delivery catheter. Boston Scientific will rowings outstanding under the Japanese credit facili- pay approximately $345 million in cash plus additional ties at an interest rate of 1.5% at December 31, 2000 cash amounts contingent upon achieving performance compared to no borrowings at December 31, 1999. At and other milestones. The transaction is subject to December 31, 2000, approximately $108 million of regulatory approval and is expected to be consummat- notes receivable were discounted at average interest ed in the second quarter of 2001. rates of approximately 1.5% compared to $112 million On February 27, 2001, the Company acquired privately of discounted notes receivable at average interest rates held Embolic Protection, Inc., a developer of embolic of approximately 1.4% at December 31, 1999. protection medical devices. Boston Scientific will pay The Company has recognized net deferred tax assets approximately $75 million in cash and assumed restrict- aggregating $226 million at December 31, 2000, and ed stock and options plus additional amounts contin- $238 million at December 31, 1999. The assets relate gent upon achieving certain performance milestones. principally to the establishment of inventory and Contingent payments would be made in cash or stock product-related reserves and purchased research and of Boston Scientific at the Company’s election. development. In light of the Company’s historical On February 28, 2001, the Company announced the financial performance, the Company believes that signing of a definitive agreement to acquire Quanum these assets will be substantially recovered. Medical Corporation (Quanum), a manufacturer of The Company is authorized to purchase on the open medical devices that specializes in drug delivery systems. market and in private transactions up to approximately Boston Scientific will pay an immaterial amount in 60 million shares of the Company’s common stock. stock as initial consideration plus additional payments Stock repurchased under the Company’s systematic contingent upon achieving performance and other plan will be used to satisfy its obligations pursuant to milestones. Contingent payments would be made in its equity incentive plans. Under the authorization, stock of Boston Scientific. the Company may also repurchase shares outside of the On March 5, 2001, the Company announced the Company’s systematic plan. These additional shares acquisition of Catheter Innovations, Inc., a manufac- would principally be used to satisfy the Company’s turer of vascular access products. Boston Scientific will obligations pursuant to its equity incentive plans, but pay an immaterial amount as initial consideration plus may also be used for general corporate purposes, additional payments contingent upon achieving per- including acquisitions. During 2000, the Company formance and other milestones. Contingent payments repurchased approximately 12 million shares at an would be made in cash or stock of Boston Scientific at aggregate cost of $222 million. As of December 31, the Company’s election. 2000, a total of approximately 38 million shares of the Company’s common stock have been repurchased. These acquisition transactions involve contingent payments. The Company expects to make contingent In December 2000, a jury found that the Company’s payments in 2001 of approximately $100 million to NIR® coronary stent infringed one claim of a patent $200 million for performance and other milestones owned by Johnson & Johnson. A final decision has not achieved in connection with these transactions. All yet been entered pending post trial motions. The of these transactions will be accounted for using the Company could be found liable and owe damages purchase method of accounting. of approximately $324 million for past sales, plus interest, and additional damages for sales occurring Management believes it is developing a sound plan to after the jury verdict. The Company expects to appeal integrate these businesses. The failure to successfully any adverse determination and post the necessary integrate these businesses effectively could impair the bond pending appeal. Company’s ability to realize the strategic and financial boston scientific and subsidiaries f-9
  26. 26. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) objectives of these transactions. As the health care The Company enters into foreign exchange forward environment continues to undergo rapid change, contracts to hedge its net recognized foreign currency management expects that it will continue to focus on transaction exposures for periods consistent with strategic initiatives and/or make additional invest- commitments, generally one to six months. In addi- ments in existing relationships. In connection with tion, on January 1, 2000, the Company initiated a these and other acquisitions consummated during the program to hedge a portion of its forecasted inter- last five years, the Company has acquired numerous company and third-party transactions with foreign in-process research and development projects. As the exchange forward and option contracts upon adoption Company continues to build its research base, it is of the Financial Accounting Standards Board reasonable to assume that it will acquire additional Statement No. 133, “Accounting for Derivative research and development platforms. Instruments and Hedging Activities.” Hedging activity is intended to offset the impact of currency fluctua- Additionally, the Company expects to incur capital tions on forecasted earnings and cash flow. However, expenditures of approximately $100 million during the Company may be impacted by changes in foreign 2001. The Company expects that its cash and cash currency exchange rates related to the unhedged equivalents, marketable securities, cash flows from portion. The success of the hedging program depends, operating activities and borrowing capacity will be in part, on forecasts of transaction activity in various sufficient to meet its projected operating cash needs, currencies (currently the Japanese yen and the euro). including capital expenditures, restructuring The Company may experience unanticipated foreign initiatives, and the above-mentioned acquisitions of currency exchange gains or losses to the extent that businesses. there are timing differences between forecasted and actual activity during periods of currency volatility. Further, the Company continues to engage in negoti- The Company had foreign exchange forward and ations to acquire Medinol. If the Company is success- option contracts outstanding in the total notional ful in its attempt to acquire Medinol, the Company amount of $452 million and $128 million as of will need additional financing capacity to consummate December 31, 2000, and 1999, respectively. The the transaction. Although the Company believes it will Company has recorded approximately $37 million of be able to obtain additional financing, there are no assets and $1 million of liabilities to recognize the fair assurances that additional financing can be or will value of its contracts outstanding on December 31, be obtained. 2000, as compared to an immaterial amount at December 31, 1999. Foreign exchange contracts that hedge net recognized foreign currency transaction exposures should not subject the Company’s earnings Market Risk Disclosures and cash flow to material risk due to exchange rate In the normal course of business, the Company is movements because gains and losses on these contracts exposed to market risk from changes in interest rates should offset losses and gains on the transactions being and foreign currency exchange rates. The Company hedged. Hedges of anticipated transactions may sub- addresses these risks through a risk management ject the income statement to volatility. program that includes the use of derivative financial instruments. The program is operated pursuant to A sensitivity analysis of changes in the fair value of for- documented corporate risk management policies. The eign exchange contracts outstanding at December 31, Company does not enter into any derivative trans- 2000 indicates that, if the U.S. dollar uniformly actions for speculative purposes. weakened by 10% against all currencies, the fair value of these contracts would decrease by $37 million as The Company’s floating and fixed-rate investments compared to a $9 million decrease based on foreign and debt obligations are subject to interest rate risk. exchange contracts outstanding at December 31, 1999. As of December 31, 2000, a 100-basis-point increase While these hedging instruments are subject to fluctu- in interest rates, assuming the amount invested and ations in value, such fluctuations are generally offset borrowed remained constant, would not result in by changes in the value of the underlying exposures a material increase in the Company’s then current being hedged. As the Company has expanded its inter- net interest. national operations, its sales and expenses denominated f-10 boston scientific and subsidiaries