COMEBACK OF THE YEAR

Boston Scientific's makeover propels upswing

By Naomi Aoki, Globe Staff, 5/20/2003

Market Value 100 All the charts

ames Tobin planted the seeds of a turnaround not long after joining Boston Scientific Corp. as its new president and chief executive four years ago.

He closed three plants, cut 1,000 jobs, and put in place a plan to reduce the manufacturing mishaps that turned devices into scrap. He funneled the savings ($110 million in 2001, $220 million in 2002, and $250 million this year) into researching and developing new products.

Today, those products are driving the Natick company into a period of booming growth. Profits for the first three months of this year were up 30 percent over the same period last year, even as the medical products firm spent 36 percent more on research and development.

"It's not magic," Tobin said. "It's actually kind of boring. But it's what you need to do to convert wasted efforts in the plant into R&D dollars for products that will help people and ensure the company's future."

Beleaguered by a troubled relationship with its Israeli stent partner and a series of product delays, Boston Scientific fell from its position in the late 1990s as a top player in the $2.3 billion market for stents, the tiny metal mesh devices used to prop open clogged arteries.

The increased investment in research freed the company from its reliance on the outside stent maker, allowing it to bring to market a new coronary stent system, Express2, developed by its own scientists. The stent, approved in Europe in 2001 and in the United States last year, has captured more than 20 percent of the US market, boosting revenues and profit margins in Boston Scientific's stent business.

The company last year also became the second to market a drug-coated stent in Europe, behind New Jersey-based Johnson & Johnson. Boston Scientific hopes to enter the US market with its coated stent late this year or early next, again trailing several months behind J&J, which won US regulatory approval last month to market its coated stent.

Being second in this race is not at all bad, analysts say. The coated stents, hailed as the biggest advance in stent technology in a decade, are expected to double the size of the market to nearly $5 billion in coming years. Since J&J and Boston Scientific are the only companies with prospects of selling a coated stent until at least 2005, both are likely to see huge spikes in stent sales.

"As much as Boston Scientific has seemed like an amazing story so far, the reality is there may be another leg of even more dramatic growth," said Daniel Lemaitre, an analyst with Merrill Lynch in Boston.

Even without the drug-coated stent, Lemaitre said, Boston Scientific could probably hold its own among medical device companies, which typically grow 10 percent year over year. The company would still have a strong bare metal stent in Express2. It also competes aggressively in the areas of interventional radiology, endoscopy, and interventional neurology and urology.

"My guess is that they could still grow in tandem with the industry," Lemaitre said.

But Tobin isn't aiming for average. The jump in profits from a loss of $54 million in 2001 to a gain of $373 million in 2002 is largely an accounting matter. (The loss in 2001 disqualified Boston Scientific from this year's Globe 100 list.) The company posted $323 million in net income in 2001 but logged $377 million in special charges chiefly related to a series of acquisitions in 2001. Minus those charges, profits grew by 28 percent last year.

Tobin expects profits to increase by nearly 30 percent this year as sales of Express2 grow in Europe and the United States and sales of the drug-coated stent climb in Europe. And in 2004, when he expects the coated stent to be on the US market, he believes profits will be double what they will be this year.

"That's a barn burner," Tobin said.

Naomi Aoki can be reached at naoki@globe.com.

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