Strategic fit

Boston Scientific Corp. yesterday said it paid about $740 million for closely held Advanced Bionics Corp. of California, aiming to capture new markets for tiny implanted electronics like hearing aids and pain-killing devices.

The all-cash deal, which could eventually generate $1 billion in sales for the Natick medical-devices maker, marks Boston Scientific's first major acquisition outside its core business of coronary stents and other technologies stemming from medical catheters. Meanwhile, Advanced Bionics shareholders could get up to $4 billion in additional payments from Boston Scientific in coming years under the terms of the transaction disclosed yesterday morning and completed by the afternoon.

Boston Scientific is best-known for its new Taxus drug-coated coronary stent, though it also has been building up other product lines such as new treatments for gastric disorders and aneurysms. In an interview yesterday, chief financial officer Lawrence C. Best said new revenue from its hot-selling Taxus helps as it shops for deals in the rapidly growing field of medical devices.

"We're constantly looking for new technology to acquire, and to have that kind of incremental cash flow is a big strategic advantage," he said. Just in the first two weeks of May, for instance, Boston Scientific said it sold $78 million worth of Taxus stents, helping it overtake rival Johnson & Johnson.

Stents are small mesh tubes used to prop open arteries after an angioplasty. The newest stents carry drugs to stop the growth of scar tissue that can require repeat angioplasties.

Shares in Boston Scientific rose $1.30 to close at $45.60 yesterday, indicating investors favored the deal, despite the big price tag. Jan David Wald, an AG Edwards analyst who said he owns 800 shares of Boston Scientific, said the company is under pressure to show it will make good use of the cash from Taxus in its acquisitions during the next year or two. After that, more competitors are expected to bring drug-coated stents to market and cut into Boston Scientific's profit margins.

"The concentration of Wall Street is on the quality of the companies they're buying and the strategic fit of those companies, and I think this was a good acquisition on both of those criteria," Wald said.

Boston Scientific has made larger purchases including its $2.1 billion buy of Schneider Worldwide in 1998, and the deal for Advanced Bionics only ranks as the sixth-largest life-sciences acquisition so far this year. Still, the flurry of deals underscores the industry's appetite to snatch up devices that can provide health benefits that drugs cannot.

Most of the $82 million in revenue Advanced Bionics expects this year will come from sales of its implant system to restore hearing loss. Known as cochlear technology, these devices are implanted to distribute sound as electrical signals to precise points on the auditory nerve, according to the company.

But other markets are also in its grasp. In April, it got clearance to sell an implantable spinal cord stimulation device to treat pain, and recently bought a company that produces an implantable drug-delivery pump.

Al Mann, who founded the Valencia, Calif., company in 1993 and remains cochief executive, said on a conference call with investors yesterday that his firm initially contacted Boston Scientific to discuss whether the larger company could help develop and market these products for various medical applications, before the talks evolved into merger.

While the exact plans for Advanced Bionics haven't been mapped out, Best said, it will likely remain as a stand-alone unit of Boston Scientific, which plans to invest another $100 million or so to cover research and development costs.

The spending will reduce Boston Scientific's earnings by 4 cents in 2004 and 6 cents in 2005. Mann said the acquisition was much more attractive than doing a public offering of stock.

"We'll be able to concentrate on the business, without the diversions of being a public company in today's environment," he said. He also said the company hopes to take advantage of Boston Scientific's large sales force.

Mann and cochief executive Jeff Greiner will continue to lead Advanced Bionics, which expects to increase revenue to $128 million in 2005. It has 550 employees, mainly in California, and controls 100 patents with 200 more patent applications pending.

Best said Mann and trusts affiliated with his family account for around 50 percent of Advanced Bionics, with other shares held by investors including the venture-capital arm of database software maker Oracle Corp.

Under the terms of the deal, Boston Scientific will purchase outright 25 percent of Advanced Bionics' shares, and will acquire the remaining 75 percent under a complex formula based mainly on whether the company achieves certain revenue and profit milestones.

To get there, Boston Scientific will have to make some hard choices about how to develop and build out the company's technology portfolio.

"Probably one of the biggest challenges with Advanced Bionics is they have so many technology and product opportunities," Best said. "It's an issue of how to prioritize the opportunities."

Ross Kerber can be reached at kerber@globe.com.