In two years in the corner office at Boston Scientific Corp. (NYSE:BSX), J. Raymond Elliott left an indelible stamp on the medical device goliath. As he steps down today, handing the keys over to interim CEO Hank Kucheman, he leaves some mighty big shoes to fill.
During his 26-month tenure, Elliott reduced the company’s workforce by more than 2,200 employees, paid down more than $2.5 billion in long-term debt, turned over more than 75 percent of the management team and reduced BSX’s exposure to Guidant Corp.’s legal woes with a $296 million deal with the U.S. Justice Dept.
Elliott also made the company a true player in emerging markets and launched an aggressive, $1 billion repurchasing program to boost BSX’s limp stock price during his final act.
Never a wallflower, Elliott sent shock waves along Wall Street when he announced his resignation in May. BSX shares promptly tumbled nearly 10 percent from an opening price of $7.71 and haven’t climbed back since.
He took over in August 2009 at the end of Jim Tobin’s controversial 10-year reign, which oversaw the unfortunate Guidant Corp. acquisition, which has since been named the "second-worst" merger of all time, trailing only the ill-fated Time Warner-AOL union.
Tobin’s last three years saw the company’s coffers shrink tremendously, with $3.5 billion in losses in 2006 and $2 billion in losses in 2008. Elliott was tapped on the strength of his reputation as a turn-around artist.
His hiring won the company an upgrade from Leerink Swann analyst Rick Wise, who wrote that "Ray Elliott’s fresh look at the business and relentless focus on driving profitable sales growth will yield significant operating margin expansion and above-average [earnings per share] and cash flow growth."
When taking the reins, Ray Elliott promised to expand the company’s reach into other markets, citing women’s health as a possible target. But Boston Scientific was carrying a huge debt load, with about $2.7 billion due in 2011, and billions due in legal settlements over stent patent infringement lawsuits and damaging kickbacks scandals involving Guidant.
Elliott soon became a force to be reckoned with, launching a soup-to-nuts restructuring that initially saw layoffs of between 1,000 and 1,300 workers and a vast reworking of the corporate and management structures.
Elliott’s forceful personality was also quickly apparent, beginning with his retort to a Heart Rhythm article (PDF) that found a potentially fatal design flaw in BSX’s Cognis and Teligen defibrillators. The company’s response was quick, public and vociferous, calling the analysis "unacceptable" and "completely out of line."
Not one to mince words, Elliott’s candid commentary made earnings calls and analysts’ Q&As a treasure trove of quotable jabs at competitors. He was a loud proponent of repealing the 2.3 percent medical device tax, calling it "an outrage" that’s "soaking one of the last remaining industries in this country" to pay high wages.
During his tenure, Elliott steered Boston Scientific through a $470 million shortfall stemming from the shutdown of its defibrillator operations. Analysts predicted that the company would sell off either its neuromodulation or neurovascular division to cover the losses. Sure enough, in October 2010, Stryker Corp. (NYSE:SYK) picked up Boston Scientific’s neurovascular division for a cool $1.5 billion. Elliott said the sale would help the company refocus its sprawling operations and provide much-needed cash to make acquisitions and pay down debt.
The move wasn’t universally lauded, and analysts wondered if Boston Scientific hadn’t sold the wrong neuro unit. "We think it is a net negative, strategically," David Lewis, an analyst with Morgan Stanley, wrote in a research note at the time. "This business was profitable and poised to improve post-product cadence, and Boston had expertise in endovascular."
The move meant an immediate quarter-billion dollar loss in sales for BSX’s 2011 forecast, but Elliott maintained that it was part of a "difficult but necessary transition year that will set the table for 2012," adding that hard times were just part of setting a listing ship back on course.
"Somewhere along the way you have to bite the bullet and do the right stuff," he told investors during the an earnings call in February.
Elliott announced his retirement just four months later, saying he planned to step down by the end of the year. Despite his lame-duck status, he continued to reshape the company well into the summer, as BSX continued to search for a replacement.
A lame duck with one hell of a quack, that is, as evidenced by an exchange during the company’s second-quarter conference call with investors. Glenn Novarro from RBC Capital Markets said that most of The Street saw Elliott’s retirement announcement as as an indication that the turnaround was foundering.
"I think most of The Street looked at your retirement and said there must be something wrong with the turnaround, something must be failing, there must be another shoe to drop," Novarro said.
"I’m leaving because I’m old, Glenn," Elliott replied, adding, "No, there’s nothing. There is no ‘shoe to drop.’ Health’s fine, business is in great shape. I’m doing what I came here to do."
Last month, Boston Scientific announced that it had found a replacement in Michael Mahoney, chairman of Johnson & Johnson’s (NYSE:JNJ) medical device and diagnostics group.
As Elliott vacates the corner office, he’ll turn the keys over on an interim basis to Hank Kucheman, currently the executive VP and group president of the cardiology, rhythm & vascular group. Kucheman will steer the ship until Mahoney clears up post-employment obligations with JNJ and fully transitions into the role of president & CEO in November 2012.
As the changeover quietly began today, with the med-tech giant offered no comment, we here at MassDevice are left wondering how the three men are managing the office swap, but we’ll have to wait until Thursday’s earnings call with investors to find out.
