MassDevice.com sat down with Boston Scientific (NYSE:BSX) CFO Jeffrey Capello in New York City this week on the heels of the medical device company’s analyst day to discuss its outlook for 2013 and beyond.
After nearly 3 years of cost-cutting and re-shaping, under the leadership of as many CEOs, officials at Natick, Mass.-based Boston Scientific are bullish about the company’s prospects as it moves past one of the roughest patches in the firm’s illustrious history.
Capello told us what the company expects to do in the next 12 months when it comes to M&A, using its free cash flow and restructuring.
MassDevice: Where are you in terms of getting the company back into the black for the year?
JC: In terms of revenue growth, I think we’ll get the company back in the black in the 2nd half of the year and that will be the 1st time in 2 to 2.5 years.
MassDevice: What will drive the turnaround?
JC: In the 1st quarter, we’re still up against a difficult comparable for U.S. [drug-eluting stents], so we’ll cycle through that. The 1st quarter will be challenging. The 2nd quarter should be better.
By the 3rd and 4th quarters, we’ll have Promus Premier out in the market in the U.S. We’ll have it out in the E.U. for a couple quarters. We’ll have the emerging markets growing. There are just a number of things that are lining up that make the 3rd and 4th quarters look pretty promising for us.
MassDevice: How active do you expect to be on the M&A market this year?
JC: I think we’ll be pretty active – maybe not as active as we’ve been in the last 18 months, when we’ve done 10 deals. I don’t think we’ll keep up that pace, but we’ll be active and also selective.
I think you’ll see us look towards more mature companies. Companies with operations and revenue and earnings. I’m not anticipating any large deals or mega-deals – bolt-on acquisitions, tuck-in deals.
MassDevice: So, similar to the Cameron Health deal, that kind of profile, or maybe even bigger?
JC: With Cameron we paid $150 million up front and $150 in a short-term milestone. A couple hundred million is probably the sweet spot for us.
MassDevice: In terms of the expanded restructuring program, have you broken out which units the layoffs are coming from?
JC: We didn’t break it out, but a lot of it comes from the corporate global infrastructure groups, which were built and invested in when we were a much bigger company and were growing. We have shrunk in 2010, 2011 and 2012, so those functions were too big. A big piece of it was right-sizing those functions for our revenue base today. There’s also a piece in the business that wasn’t performing well, so that was part of it as well.
MassDevice: Former CEO Ray Elliott used to take it as a point of pride that 75% of Boston Scientific’s senior management turned over during his tenure. Are you guys done with that trend?
JC: I think we’ve got a pretty solid team, but that will be up to Mike Mahoney. He’s been here 1.5 years now, so he’s got a pretty good handle on the team and the players he has in the various leadership roles.
I also think that it will all depend on performance. If you’re running an organization where your expectations are for high performance, then people have to perform.
MassDevice: Have performance expectations changed?
JC: No, it was always an expectation of high performance, but we also had a different person in charge almost every year. We’ve had 4 CEOs in the past 5 years, so you can have high performance, but when you have those changeovers you start fresh with the new guy coming in saying, ‘Let’s get to know everybody.’ I think it will be an environment in which performance and execution will be good. The portfolio is there, now it’s all about execution.
MassDevice: Boston Scientific’s 2013 medical device tax bill is expected to be $75 million. That’s a little lower than you had said previously. What’s the difference? Is it not as bad as you originally thought?
JC: We had in $100 million at the previous investor day, but that was also when we had more sales, and it’s based on how you calculate the tax. It’s pretty simple – 2.3% of U.S. sales, and then there’s other calculations of gross or net sales.
MassDevice: Is it related to the restructuring?
JC: It is. At the end of the day, we made challenging decisions on resource levels because our shareholders expect us to deliver earnings-per-share growth. And you end up with a $75 million tax, and cash-flow-wise and earnings-wise, you’ve got to work your way through that.
MassDevice: You’ve initiated a fairly aggressive share buy-back program over the last few months. Is it more aggressive than in recent years?
Jeff Capello: Certainly. We had a pre-existing share buyback before 2011 that was more or less dormant. There was about $200 million left on it. Then we put a new program in place in 2011. Based on our view of the value of the company, we decided to go ahead and initiate the the new program. We put it in place pretty quickly within a 12-18 month period, faster than we thought, because the stock was so undervalued. Given the fact that we anticipate that there’s a lot of opportunity to grow the stock price, we put another program in place 2 weeks ago with the board’s support. I think there continues to be an opportunity to drive shareholder value by buying back the shares at a discount, which is where they are today.
MassDevice: How much of the most recent spike in share price do you attribute to positive feelings about the story Boston Scientific is telling to investors and how much is related to the share re-purchasing program?
JC: I think it’s 3 pieces. Two years ago, this was a story about managing expenses and driving earnings on cost-savings for a couple years and that was 2011-2012. By ’13’ and ’14 the growth programs were supposed to start. Fast-forward 2 years and now we’re on the doorstep of having the growth take-off, so I think that’s 1 dimension. We had 2 or 3 growth programs, now we have 7 growth programs and a number of them are supposed to go into effect in 13′ and all of them by 14′.
There’s also the dimension of our confidence in the company. Any time you buy back 12% of the company, people say, "Wow, that’s a lot. If they continued on that pace you could extrapolate that the company would be private."
That won’t happen because if you keep buying back that much stock the price of the stock just continues to go up. But I think it’s a balance of those 2 things and the company’s performance in the 4th quarter. Being down 1% isn’t any reason to jump up and down and celebrate, but it’s movement in the right direction. We performed at the market and people are starting to recognize that we’re getting some traction.
MassDevice: Is the market starting to bake in the performance of Boston in relation to the overall performance of the CRM and DES markets?
JC: Yeah, but I think the other thing not to lose sight of is that the CRM market was down 3% in the 4th quarter and the DES market was down 2%. What we told people today was that we think both those markets will improve over the next couple years as the emerging markets become a bigger piece of the global market, because those are growing quite well.
MassDevice: As far as improving the U.S. DES business, how much of that relies on introducing new products and how much is a function of neutralizing competitors’ launches?
JC: I think it’s a little bit of both. We had Promus Element come out a year and a half ago and we went up to 50% of the market in the U.S. Then Medtronic (NYSE:MDT) comes out with Integrity Resolute and they go from 12% share to 20% share, and then Abbott took some share. Share tends to move around much more quickly on the DES side.
On the CRM side, share doesn’t tend to move around unless you have a recall or a quality event. That’s one of the reasons why we’re so excited about Promus Premier, which is a next generation stent that gives us an opportunity to go back and take some of that share back.
MassDevice: The company kicked off around $380 million in free cash last quarter, which if you did that every quarter would put you on pace for more than $1.2 billion in 2013. How much of that will be allocated to share buy-backs?
JC: Right now, we’re saying that we’re using a measurable portion for buy-back stock and share re-purchase. We did 50-50 in 2012, that’s not a bad assumption for 2013. We have some tax and legal contingencies that we’re going to keep our eye on. We’ll stay opportunistic with business development and we’ll watch our contingencies but we’re going to continue to buy back stock.