A bold but risky move

Executives at any big medical-device company launching a critical new product know two things in their bones.

One: Those new devices can generate such powerful profits that it seems to rain money. The other: Weather is changeable.

Medical-device advances that create vast riches always face relentless competitive pressure that squashes fat profits sooner rather than later.

Boston Scientific Corp. of Natick knew these facts very well when its highly anticipated Taxus drug-coated coronary stents hit the US market in 2004. It went into overdrive buying or seeding lots of developing companies and technologies, betting at least one of them would become the next big thing by the time its Taxus bonanza faded.

And then one day -- yesterday -- everything changed. Boston Scientific's unsolicited $25 billion offer for Guidant Corp., which has already agreed to be purchased by Johnson & Johnson at a lower price, represented a strategic 180-degree turn. It contemplated a merger of equals that could instantly propel Boston Scientific by leaps and bounds, an expensive and risky proposition.

This didn't resemble any of the other transactions that Boston Scientific's deal team, working directly for chief financial officer Larry Best, had pushed through before.

Their best ideas usually made it to a large conference room on the executive floor at Boston Scientific's headquarters, the one with a sign designating it as the ''war room." Some of these transactions involved interesting technologies that did things like implant spinal painkillers and other electronics, or make disposable strips that could be placed on a patient's head to monitor brain waves.

But Boston Scientific had spent only about $2.5 billion on its deals over the two years prior to 2005. The war was being fought one small battle at a time.

So what led Boston Scientific to drop a bombshell like yesterday's offer for Guidant?

Most important, the old strategy wasn't working very well. Investors were increasingly concerned about potential competition facing Boston Scientific's Taxus franchise by 2008, and it showed in the stock price. Meanwhile, none of the company's technology prospects appeared close to becoming commercial business that could offset those worries.

Boston Scientific shares had slumped from more than $35 at the start of the year to below $23 in October. The company, which goes head-to-head with only Johnson & Johnson for sales of drug-coated stents today, faces two likely competitors on the horizon -- and the most dangerous new threat seemed to be posed by Guidant.

There was another reason why Guidant appealed to Boston Scientific and Johnson & Johnson. Both companies already make huge profits with stents but want a piece in another rapidly growing heart-treatment market, selling defibrillators that help patients keep a regular beat.

Among the leading takeover targets in that market, Guidant was the most appealing. The other, St. Jude Medical Inc., will probably become an expensive second choice for the bidder who does not buy Guidant.

The picture got more complicated this summer when Guidant had to recall defibrillators, leading to investigations and lawsuits. The recall also forced Guidant to accept a lower purchase price from Johnson & Johnson last month. The bid made yesterday by Boston Scientific falls between the original and revised prices Guidant accepted from Johnson & Johnson.

With an acquisition of Guidant, Boston Scientific could enter new medical markets in a big way and dampen future competition. But it would have to manage through Guidant's current regulatory and legal mess. Boston Scientific also would take on significant debt and dilute earnings per share through 2007.

Medical-device companies compete in business cycles that are short and appear to be getting shorter. Boston Scientific may have once believed it had more time to ride high with its Taxus stent. Its actions said otherwise yesterday.

Steven Syre is a Globe columnist.He can be reached atsyre@globe.com.