Boston Scientific Corp. is adding debt to an already tight balance sheet to acquire a Minnetonka-based medical device company and create a billion-dollar urology business.
Boston Scientific, which already employs about 5,000 people in the Twin Cities, announced plans to acquire the men's health division of American Medical Systems for $1.65 billion. AMS offices have long been in Minnetonka, though the company was acquired in 2011 by the Ireland-based drug company now known as Endo International PLC.
About 500 of Endo's 1,000 AMS employees are in Minnesota, and of those, about 275 work for the division that Boston Scientific is acquiring. The deal is expected to close in the fall, pending customary approvals. AMS workers in Minnesota not affected by the deal will continue to work in the company's litigation-racked women's health division, which Marlborough, Mass.-based Boston Scientific is not buying.
The strategy behind Boston Scientific's acquisition of devices to treat men's urinary incontinence and erectile dysfunction from a drug company reflects a trend among global health care companies to sell off assets in diverse fields and build depth in discrete niches in response to cost-cutting pressures in the industry. On Monday, health care's largest and most diverse company, Johnson & Johnson, announced plans to sell off its line of Cordis stents for $1.9 billion and complete its exit from the business of interventional cardiology.
"In the past, a lot of these companies were sort of everything to everyone," said Venkat Rajan, a health care analyst with consulting firm Frost and Sullivan. "Whereas now, devices are becoming more commoditized and reimbursement is going down. Companies are more focused on owning a greater stake of a disease state."
Boston Scientific executives said Monday their goal is to create a market-leading urology division that will generate nearly $1 billion in revenue.
Boston Scientific is buying AMS' laser-therapy systems to treat benign prostatic hyperplasia, a form of prostate enlargement that affects 90 million men, plus devices for male stress urinary incontinence and erectile dysfunction. Those devices will roughly double the size of Boston Scientific's $535 million urology and women's health business, which includes technologies to treat kidney stones, pelvic organ prolapse, and female stress urinary incontinence and abnormal uterine bleeding.
"It's really about creating category leadership in a strong market," Boston Scientific Urology and Women's Health President Karen Prange said in an interview.
The $1.65 billion purchase price is roughly four times the $400 million annual revenue of the division it is buying, and Boston Scientific will have to borrow to finance the entire deal.
The deal's upfront costs may offset its earnings benefits through 2017. The company told investors that the acquisition will contribute 3 cents per share to earnings in 2016, and 7 cents the year after that, on an adjusted basis. But including the costs for buying and integrating the AMS division into Boston Scientific will wipe out some or all of those earnings. By 2018, the company expects to realize annual pretax synergies of $50 million.
The market sent Boston Scientific shares up 1 percent on Monday to close at $17.06. "We believe this transaction will place BSX in a leadership position in the urology market," Sterne Agee analysts wrote in a note to investors Monday, using Boston Scientific's stock-ticker abbreviation.
But bond analysts sounded a cautionary note about the borrowing that will be required to finance the deal.
Boston Scientific's corporate credit rating hovers one notch above junk-bond status with analysts at both Moody's Investors Service and Standard & Poor's Ratings Services. Following news of the deal on Monday, both affirmed their existing ratings, but S&P dropped its long-term outlook to negative, from stable.
S&P said in a note to bondholders that its analysts were surprised that Boston Scientific was willing to take on so much debt, but company management seems to have the free cash flow and the willingness to quickly retire the bonds. "We could lower the rating if we believe the company's commitment to de-leveraging has weakened, if future legal expenses materially exceed our forecast, or if the company underperforms our expectations," the S&P analysis said.