Boston Scientific Corp
The settlement, announced by Boston Scientific on Monday, comes as the medical device maker tries to reduce its financial risk by cutting down on the volume of litigation in which it is involved. But the hefty price tag surprised analysts.
Typically, you don't see this size of a settlement. That is unusual, said Morningstar analyst Debbie Wang.
Boston Scientific expects to record an additional charge to earnings for the settlement in its fourth-quarter results to be released next week, after disclosing a $237 million charge last April, said company spokesman Paul Donovan. He did not disclose the size of the new charge.
Boston Scientific. which announced a separate $716 million stent settlement with J&J in September, said it has now settled 17 lawsuits with its rival, as well as disputes with other competitors and the U.S. government, and there are no remaining material judgments pending against it.
Boston Scientific shares fell 21 cents, or 2.4 percent, to $8.42 in afternoon trading on the New York Stock Exchange, while J&J rose 19 cents to $63.05.
AVOIDING JURY TRIAL
We believe today's settlement -- while substantial -- is in the best interest of the company and its shareholders, Boston Scientific Chief Executive Ray Elliott said in a statement. It resolves major litigation without exposing Boston Scientific to the uncertainties of a jury trial and a potential damages award that was impossible to predict.
Under the settlement, Boston Scientific will pay $1 billion now and the remainder by the first week of January 2011. It plans to post a $745 million letter of credit to cover the balance and interest.
The company will use $800 million in cash on hand and $200 million in borrowings from credit facilities to fund the initial payment, with the balance to come from cash flow generated this year, Donovan said.
Boston Scientific said it does not expect the payments to have a significant effect on its debt covenants and said it still plans to refinance its 2011 debt maturities in mid-2010.
Wells Fargo Securities analyst Larry Biegelsen said the settlement, together with debt from the company's $27 billion purchase of Guidant in 2006, could hamper Boston Scientific's ability to supplement its product pipeline with acquisitions.
We also continue to believe that (Boston Scientific) will announce another restructuring in the near future, he said.
J&J and Boston Scientific were the first two companies to bring drug-coated stents to market. Their products now also compete against stents from Medtronic Inc
Stents are small mesh tubes used to prop open arteries that have been cleared of blockages via angioplasty.
The dispute between Boston Scientific and J&J centered on J&J's claim that its Palmaz and Gray patents were infringed by Boston Scientific's Express, Taxus Express and Liberte stents.
Boston Scientific alleged that its Jang patent was infringed by J&J's Cypher, BX Velocity and Genesis stents.
In 2005 the companies were found to have infringed each other's patents, and damage claims were set to be decided by two jury trials this month in U.S. District Court in Delaware. Now, those trials will not take place, Boston Scientific said.
J&J said it continues to assert four patents against Boston Scientific's latest-generation Promus stent products, as well as against Abbott, which shares in profits from Promus. The patents are known as Morris, Llanos, Wright and Falotico.
District court Judge Sue Robinson last month invalidated the Wright and Falotico patents in a J&J lawsuit against Boston Scientific involving Promus. J&J said it is appealing that decision.
A third dispute was set to go to court in September, but that trial now will also be canceled.
(Additional reporting by Lewis Krauskopf, Michele Gershberg and Ransdell Pierson, editing by Dave Zimmerman and John Wallace)