A rating agency specializing in evaluating risky investments added Boston Scientific (NYSE:BSX) to its "Risk List," citing the ongoing fallout from its ill-starred Guidant buyout, its accounting and governance practices and how it pays its executives.
Paul Hodgson, chief communications officer for GMI Ratings, writes that "Boston Scientific presents concerns on a range of social, governance, and accounting factors. Prudent investors will likely wish to subject the company to increased levels of scrutiny and engagement for some time to come."
That’s largely due to the implications for its due diligence process stemming from the Guidant deal, which has cost it nearly $500 million in settlements and fines, Hodgson notes.
"While the Guidant acquisition has strengthened the company’s product line, it is also widely recognized as highly problematic. Most notably, the company has faced a major controversy relating to the concealment of a defibrillator design flaw by Guidant. By 2010, Boston Scientific had paid $234 million in settlements to affected patients, and in 2011, the company paid $296 million in fines on behalf of Guidant to the U.S. Dept. of Justice as a penalty for misleading statements to the Food & Drug Administration. About 30 product liability lawsuits are still pending against the company related to this matter, as well as a small number of personal injury suits," Hodgson writes. "Moreover, the Guidant headaches do not appear to be a thing of the past: In December 2011, the company received a Notice of Deficiency from the IRS (which it is contesting) asserting that it owes over $581 million in back taxes for Guidant for 2004-2006. In addition, the DOJ has also filed a False Claims Act case against the company, again related to actions by Guidant; the case will be heard in 2013."
Hodgson also takes the company to task for some balance sheet issues "suggestive of overvalued assets," including a high ratio of goodwill to assets, low asset turnover and low cash ratio. The 250 lawsuits it’s facing over its transvaginal mesh products don’t help either, he notes.
"In terms of traditional governance issues, as well, Boston Scientific has a number of problems," Hodgson writes. "For instance, there are concerns regarding takeover defenses and board entrenchment. Supermajority voting provisions in the charter and bylaws restrict shareholders from making many meaningful governance changes. Approval of 80% of shares is required to amend an article in the charter relating to directors, and approval of 80% of shares is required to amend sections in the bylaws relating to stockholders’ meetings, director nominations, and director removal (with or without cause). In addition, it is noteworthy that four of the board’s eleven directors are long-tenured with at least a decade of service; long tenures may sometimes compromise independence and objectivity."
"Furthermore, there are signs that the company’s executive pay practices may not be optimally aligned with investors’ interests," he writes, citing a $33 million pay package for former CEO Ray Elliott and the deal struck with soon-to-be-CEO Michael Mahoney worth about $20 million.
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