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July 20, 2015 FOCUS: LIFE SCIENCES

Analysts brush off BSX settlements in product lawsuits

In May, Marlborough-based Boston Scientific Corp. lost a $100 million verdict in a case over its transvaginal mesh products. A month before that, it settled nearly 3,000 similar suits for $119 million. More cases over the defective devices, women's health products that were intended to support internal organs and treat incontinence, are still pending.

But the suits represent only a blip on a course that analysts say is likely to trend upward for several years to come.

“In general, we have a bullish outlook for the company,” said Joshua Jennings, a managing director with financial services firm Cowen & Co.

Jennings said Boston Scientific has one of the best growth trajectories in the medical device industry, with 5 percent annual revenue growth and expanding margins. One of the company's big strengths today is its new and soon-to-come products. That includes a new kind of implantable defibrillator, a stroke-prevention device and a coronary stent using bioabsorbable polymer coating that avoids subjecting patients to long-term contact with polymers.

“They're running on all cylinders, and there's more to come,” Jennings said.

The company's stock price suffered a bit in June, falling about 4 percent while the medical device industry as a whole held fairly steady. But the decline came after a huge jump in Boston Scientific's performance following its settlement of a longstanding legal dispute with Johnson & Johnson in February. The rival company had sought $7.2 billion in damages over a conflict related to Boston Scientific's acquisition of cardiovascular equipment maker Guidant Corp. in 2006, but the companies ultimately settled for $600 million.

Jennings said the big dollar signs attached to the case had kept investors a bit skittish about the company's stock. “Seven billion seemed outlandish,” he said, “But you never know.”

With that suit no longer hanging over Boston Scientific's head, its stock price rose by a third from the start of the year before it leveled off in April.

In early May, before the $100 million verdict in the transvaginal mesh case, Matthew Taylor, an analyst with Barclays Capital Inc., noted that Boston Scientific had moved toward offering settlements in cases surrounding the mesh product rather than going to court. He wrote that there were about 23,000 cases left. If they were settled at about $40,000 — the average settlement level so far — that would imply another $290 million in liabilities.

Boston Scientific did not respond to a request to comment for this story. In an earnings call earlier this year, President and CEO Mike Mahoney said the company's total legal reserves stood at $1.453 billion at the end of March, though that included $300 million that was later paid as the second half of the Johnson & Johnson settlement.

Forecast: Larger growth than peers

Like Jennings, Taylor expressed a fairly bullish view of Boston Scientific, writing that, between its core business and new products, it should grow by “mid single digits” or more for the next two to three years.

Along with developing new products, the company has announced some acquisitions. In March, it said it would acquire the urology division of American Medical Systems for $1.6 billion. In April, it announced a much smaller deal to buy endoscopic ultrasound device maker Xlumena Inc. for at least $62.5 million.

Beyond the Johnson & Johnson case, Boston Scientific is digging out from years of tough times. It reported a net loss for the past three years running. But as of the first quarter of the year, it predicted a profitable year in 2015, with earnings per share of 32 to 38 cents.

Taylor wrote that the company has emerged from a turnaround phase. Mahoney, who became CEO in 2012, has led a management reorganization effort, switching from a system based on country-specific leaders to one in which global business leaders are responsible for increasing sales and profits in various product areas.

Jennings puts it another way, praising Boston Scientific's “operational excellence initiatives” as a departure from missteps made in earlier years, particularly within the company's cardiac division.

The company will reveal its results for the second quarter of the year on July 23, providing a new window into its progress toward better sales and greater profitability. But analysts say what we really need to look at to gauge its progress are the products it's rolling out.

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