TEXT-Fitch affirms Boston Scientific ratings
July 19 - Fitch Ratings has affirmed Boston Scientific Corp.'s (NYSE: BSX) Issuer Default Rating (IDR) at 'BBB-'. A full list of BSX's ratings follows at the end of this release. The rating action applies to approximately $4.26 billion of debt. The Rating Outlook is Stable. RATING RATIONALE: --During the latest 12-month (LTM) period ended March 31, 2012, BSX has operated with relatively stable leverage (total debt/EBITDA), ranging between 2.0-2.5x, although current leverage at 2.5x leaves little flexibility for additional debt. --BSX's business model reliably generates solid FCF, owing to strong margins, relatively dependable revenue and manageable CAPEX requirements. --While the industry faces soft procedure volumes in Cardiac Rhythm Management segment, Fitch expects that the BSX's remaining businesses (in aggregate) will generate solid single-digit growth. --Pricing in the CRM and DES segments remains a challenge, although new product introductions in both segments are helping to support margins. --Progress with new product development across all of its business segments and targeted acquisitions should help BSX remain competitive and support long-term growth. RATING DRIVERS: The key rating drivers for this credit are leverage, EBITDA margins, FCF and general operational stability. The 'BBB-' leverage range for this credit is approximately 2.0x-2.5x. Margin variability of less than 300 basis points and material FCF generation are also expected. SOLID CASH FLOW DESPITE HEADWINDS: The company generated roughly $1 billion in FCF (LTM: March 31, 2012), despite challenging market conditions with respect to revenue and pricing. The company is introducing new products and working to improve operational efficiency to support margins. Fitch believes BSX will be successful in its efforts and expects the company to generate $900 million to $1 billion of free cash flow during 2012. CARDIAC RHYTHM MANAGEMENT (CRM) MARKET REMAINS SOFT: BSX's CRM business has declined 8% during the LTM period ended March 31, 2012, primarily because of a negative article published in a medical journal highlighting the practices of U.S. physicians regarding the implanting of implantable cardiac defibrillators, unfavorable foreign exchange movements, and weak pricing. However, new product introductions, problems with a competitor's since-discontinued leads, and strong growth in emerging markets are helping to mitigate the industry factors dampening growth. SOFT REVENUE BUT IMPROVING PROFITABILITY FOR STENT SEGMENT: BSX's stent business has declined 3% during the LTM period ended March 31, 2012, largely driven by BSX's continued market launch of Promus Element in the U.S. being more than offset by a competitor's stent. However, BSX is significantly improving margins in this segment as it converts Promus sales (which BSX shares profitability with Abbott Labs) to Promus Element sales, which are roughly twice as profitable for BSX. STEADY PERFORMANCE IN REMAINING SEGMENTS: Endosurgery, Neuromodulation, Peripheral Interventions and Electrophysiology are expected, in the aggregate, to deliver solid single-digit growth. The related surgical procedures in these segments are experiencing relatively strong growth and not as highly priced as the CRM and DES segments. Given the relatively smaller dollars at stake for these segments (relative to CRM and DES), payers do not appear as focused on price. In addition, Fitch expects BSX will continue to launch new products in these respective markets. As such, Fitch believes that segment margins will remain somewhat stable. LITIGATION AND REGULATORY CONCERNS: BSX has resolved a significant number of litigation issues during the past three years, including a $1.725 billion cash settlement paid to JNJ in 2010 to end three patent lawsuits. However, financial risk related to other litigation remains, including its recently disclosed tax litigation issue. The good news for the company is that recent court decisions have ruled against JNJ regarding patent lawsuits involving BSX. The healthcare reform-related 2.3% excise tax (beginning in 2013) on U.S. device sales is expected to pressure margins by approximately one percentage point. However, Fitch believes BSX's focus on cost reduction and the continued development of new value-added, higher margin devices will help to mitigate this risk. Healthcare reform should also result in moderate volume increases in 2014-2016, when the bulk of the uninsured are expected to obtain coverage. Though the Centers for Medicare and Medicaid Services (CMS) has not yet written all of the rules and regulations for the reform law, Fitch does not expect the eventual implementation of healthcare reform to affect BSX's credit rating. PRIORITIES FOR CASH: Fitch believes BSX's acquisition strategy will remain targeted, focusing on areas that offer innovation and growth. BSX will likely consider further share repurchases in lieu of debt reduction, now that its leverage is consistent with the 'BBB-' rating category. Fitch anticipates FCF will be sufficient to fund targeted acquisitions and share repurchases. As such, Fitch expects BSX will operate with leverage (total debt/EBITDA) ranging between 2.3x-2.5x during 2012-2013. However, at current leverage of 2.5x, the company has limited financial flexibility to take on additional debt. ADEQUATE LIQUIDITY: FCF for the latest 12-month period (LTM) ending March 31, 2012 was $1.02 billion. At the end of the period, BSX had approximately $284 million in cash/short-term investments; full availability on its $2 billion revolver, maturing on April 18, 2017; and full availability on its $350 million 364-day accounts receivable facility, maturing in June 2013. The company had approximately $4.26 billion in debt, with roughly $600 million maturing in 2014, $1.25 billion in 2015, and $600 million in 2016. WHAT COULD TRIGGER A RATING ACTION? Positive: Future developments that may, individually or collectively, lead to positive rating action include the following: --Continued operational improvements that could lead to significant and durable increases in FCF; --An operational profile and capital structure that would sustain leverage below 2.0x. Negative: Future developments that may, individually or collectively, lead to negative rating action include the following: --Material and lasting deterioration in operations and FCF; --Persistent increase in leverage above 2.5x; --Leveraging acquisitions without the prospect of timely debt/leverage reduction. RATING ACTIONS: Fitch has affirmed the following ratings for BSX: --Issuer Default Rating (IDR) at 'BBB-'; --Unsecured bank credit facility at 'BBB-'; --Senior unsecured notes at 'BBB-'. The Rating Outlook is Stable.
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