Fitch Ratings has rated Boston Scientific Corp.'s (BSX) $1.05 billion senior unsecured notes offering 'BBB-'. The net proceeds of the issuance with the recently completed $400 million bank term loan are expected to be used to redeem its $600 million public notes due June 2014 and its $850 million public notes due January 2015. A full list of BSX's ratings follows at the end of this release. The Rating Outlook is Stable.
KEY RATING DRIVERS:
--Fitch expects BSX will operate with relatively stable leverage (total debt/EBITDA) of 2.3x to 2.5x during the next 12 months, despite a challenging operating environment. Nevertheless, current leverage of 2.5x at March 31, 2013 leaves only modest flexibility within the company's 'BBB-' rating category.
--Fitch forecasts that BSX will continue to generate consistently solid free cash flow (FCF), owing to fairly durable margins, relatively dependable revenue and manageable CAPEX requirements. The company is expected to maintain adequate liquidity through revolver availability and access to the capital markets.
--Fitch anticipates that BSX and the industry will continue to face soft procedure volumes in Cardiac Rhythm Management (CRM) and Interventional Cardiology (IC) segments in the near term. However, BSX's remaining businesses (in aggregate) should generate solid single-digit growth.
--Pricing in the CRM and drug-eluting stent segments will likely remain a challenge, although new product introductions and cost control initiatives should help to support margins.
--Fitch believes that the company's litigation profile poses some financial risk, although the risk has been mitigated during the last four years.
FLAT DEBT LEVELS NEEDED FOR STABLE LEVERAGE IN NEAR TERM:
Fitch expects modest top-line and margin headwinds for BSX during the next 12 months. European austerity measures, moderate shifts in treatment paradigms and more aggressive negotiating postures taken by U.S. hospital providers are weighing on the medical device industry. As such, these operating pressures will likely drive BSX to keep debt levels relatively flat, in order to maintain leverage within the 2.3x-2.5x range. Fitch expects growth and profitability to improve thereafter, which will enable the company to reduce leverage without significant reliance on debt reduction.
SOLID CASH FLOW FORECASTED:
Fitch forecasts that BSX will generate $900 million to $1 billion of free cash flow during 2013, compared to approximately $1.03 billion during 2012. Relatively flat sales and efforts to support margins through continued cost controls and new product introductions will not entirely offset the Affordable Care Act's (ACA) 2.3% U.S. sales tax that became effective this year.
CRM AND IC MARKETS TO REMAIN SOFT IN NEAR TERM:
Fitch anticipates that BSX's CRM business will remain modestly challenged during the near term but not as much as in the last two years. BSX's CRM business has declined 7% during the LTM period ended March 31, 2013, primarily because of lingering effects of a negative article published in the Journal of American Medical Association (January 2011) 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 and strong growth in emerging markets are helping to mitigate the industry factors that are dampening growth.
BSX's IC segment has declined 15% during the LTM period ended March 31, 2013, largely driven by heightened competition in the drug eluting stent market, European austerity measures and pricing. Fitch expects BSX will return this segment to growth in 2014, as it introduces new products. In addition, BSX has improved margins in this segment, as it converted 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 decent growth, and the devices are not as highly priced as those in 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 continues to make progress in resolving litigation issues, resulting in an improved litigation risk profile compared to four years ago. However, financial risk related to other litigation remains, and the company will need to plan accordingly for any potential settlements, as it sets its priorities for cash deployment.
The healthcare reform-related 2.3% excise tax on U.S. device sales, which was implemented in January 2013, 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 a portion 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, assuming its operational profile improves as Fitch forecasts.
Fitch anticipates free cash flow (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 2013. However, at current leverage of 2.5x, the company has only modest financial flexibility to take on additional debt.
FCF for the LTM ending March 31, 2013 was $1.03 billion. At the end of the period, BSX had approximately $207 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. The company had approximately $4.25 billion in debt, with roughly $600 million maturing in 2014, $1.25 billion in 2015, and $600 million in 2016.
Positive: Future developments that may, individually or collectively, lead to positive rating action include the following:
--Continued operational improvements, including returning to consistently positive revenue growth and margin stabilization;
--Resulting increases in FCF that are significant and durable;
--Further progress on favorably resolving outstanding litigation issues;
--An operational profile and capital structure that would sustain leverage below 2.2x.
Negative: Future developments that may, individually or collectively, lead to negative rating action include the following:
--Continued declines in revenue and margin pressure;
--Resulting material deterioration in FCF;
--Persistent increase in leverage above 2.8x;
--Leveraging acquisitions without the prospect of timely debt/leverage reduction;
--Significant adverse outcome(s) of litigation issues.
Fitch rates BSX debt as follows:
--IDR at 'BBB-';
--Unsecured bank credit facility at 'BBB-';
--Senior unsecured notes at 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
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