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Boston Scientific unit sale seen as long-term tradeoff

CHICAGO (Reuters) - Boston Scientific Corp BSX.N will gain some sorely needed capital if it sells two units, but analysts see the move as potentially giving up a long-term driver of growth outside its main devices business.

Reuters confirmed on Thursday that the company, struggling from a costly product recall and still under a mountain of debt in the wake of its 2006 acquisition of Guidant Corp, is exploring the possibility of selling its pain management and neurovascular intervention businesses.

“I don’t want to say they’re desperate to sell, so I’ll say there is a great need to do it,” Goldman Sachs analyst David Roman said in an interview, noting that its 2011 liabilities outweigh sources of cash.

“For all we know, (CEO Ray Elliott) may have bankers breathing down his neck,” Roman said. “I don’t think this a proactive change in strategy for him. I just think it’s the reality of the situation.”

Shares of Boston Scientific, which generates more than half its revenue from implantable heart rhythm devices and heart stents, fell 1.3 percent on Friday after rising initially when the news was first reported late on Thursday.

The company’s pain management, or neuromodulation, business is widely viewed as the more attractive of the two because of its potential future growth. The neurovascular intervention business makes devices to treat vascular diseases of the brain and generated sales of $348 million last year. Analysts say the unit could fetch $800 million to $1 billion.

Selling these two units could raise net proceeds of $2.2 billion to $2.4 billion for Boston Scientific, according to JP Morgan analyst Michael Weinstein.

Neuromodulation -- using electrical pulses to stimulate the spinal cord or even the brain -- is among the most dynamic and fast-growing areas of the medical technology sector. Medtronic Inc MDT.N and St. Jude Medical Inc STJ.N are the only other players in the sector.

Johnson & Johnson JNJ.N and Abbott Laboratories ABT.N are seen as likely bidders for the neuromodulation business. Covidien COV.N, C.R. Bard BCR.N, Medtronic and St. Jude are seen as possible bidders for the neurovascular intervention business.

SHORTER TERM NEED FOR CASH

Analysts say the move illustrates how stretched the company really is. Boston Scientific needs to refinance $2.4 billion in 2011 and many fear the company will breach its covenants if it does not do something to raise cash.

The company’s shares hit a year low of $6.31 last month on news of the ICD recall, and have lost nearly half their value since trading at $11.77 last August. On Friday, the shares traded at $6.89.

Roman noted that in the past, management had characterized the neuromodulation business as an important strategic growth business. With the exception of its endosurgery business, Boston Scientific is losing share in the remaining businesses, said Roman, who has a “sell” rating on the shares.

Rick Wise, an analyst with Leerink Swann, said divesting neuromodulation would be a surprise to him since it is one of the fastest growing businesses in Boston Scientific’s portfolio.

“Selling neuromodulation could indicate a shift in portfolio strategy by current CEO Ray Elliott, as Boston Scientific potentially narrows its end market reach and focuses on stabilizing its larger franchises,” Wise said in a research note.

Last month, the company issued a recall and suspended sales of its implantable cardioverter defibrillators, or ICDs, after failing to submit the necessary documents to U.S. regulators to get approval for changes in its manufacturing processes. The U.S. Department of Justice and the Securities and Exchange Commission are investigating the recall.

Analysts estimate it costs the company $5 million in revenue every day it cannot sell its ICDs.

Reporting by Debra Sherman; Editing by Michele Gershberg, Phil Berlowitz

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