Boston Scientific - Rhythmia Medical, Another $90 Million Acquisition Highlight Poor Acquisition Track Record

Oct. 9.12 | About: Boston Scientific (BSX)

Boston Scientific Corporation (BSX) announced on Monday after the close that it will acquire Rhythmia Medical for $90 million. Additional milestone payments could drive the total deal value to $265 million, through 2017.

The Deal

Boston Scientific announced that it will acquire privately-held Rhythmia Medical, a developer of next generation mapping and navigation solutions used in cardiac catheter ablations and other electrophysiology procedures.

Boston Scientific will pay $90 million in upfront payments for the company. Furthermore Boston might pay up to $175 million in contingent payments based on regulatory, commercial and sales-based milestones through 2017.

Atrial fibrillation is a disorder disrupting the ability of the heart to beat regularly. Some 15 million people are affected worldwide. Catheter ablation enables three-dimensional mapping and navigation, commonly used to treat many heart rhythm disorders.

CEO Hank Kucheman commented on the deal, "The acquisition of Rhythmia Medical is a decisive step forward for Boston Scientific in the electrophysiology ablation business, including the high-growth segment of complex ablation. Electrophysiology is a $2.5 billion market and growing at a double-digit pace, representing a key growth opportunity for us. Rhythmia Medical has a strong and impressive team, and its technology is expected to add innovation and breadth to Boston Scientific's suite of solutions in this strategically important space."

No financial details were released for Rhythmetic Medical, founded in 2004. As soon as the mapping system is approved by the US Food and Drug Administration, Boston Scientific expects to begin a limited market launch in 2013, and a full market launch in 2014.

Boston Scientific estimates that the acquisition is expected to close as soon as this Friday, October 12th. The deal is expected to be immaterial for earnings in 2013 and 2014. The deal will be break-even or accretive to earnings in 2015 and beyond. GAAP earnings will be impacted as a result of net charges and amortization costs.

Valuation

Boston Scientific ended its second quarter of 2012 with $371 million in cash and equivalents. The company operates with $4.3 billion in short and long term debt, for a net debt position of $3.9 billion.

For the first six months of 2012, the company generated revenues of $3.7 billion. The company net lost $3.3 billion, after taking a $3.4 billion goodwill impairment charge in the second quarter of the year.

For the full year of 2012, Boston Scientific guides for annual revenues of $7.2-$7.4 billion. GAAP net losses are expected to come in between $2.09-$2.16 per share. Adjusted non-GAAP earnings are expected to come in between $0.62-$0.68 per share.

Currently the market values Boston Scientific at $8.2 billion. This values the firm at 1.1 times annual revenues. The company trades at 9 times adjusted non-GAAP earnings.

Currently, Boston Scientific does not pay a dividend.

Investment Thesis

Year to date, shares of Boston Scientific have risen some 8%. Shares rose from $5.30 in January to $6.40 during the spring months. Shares fell to lows of $5 in the summer after the company reported its second quarter results, taking a $3.4 billion goodwill impairment charge. Currently, shares are exchanging hands around $5.75 per share.

Over the past five years shares have fallen some 60%. Shares traded at $15 at the end of 2007, and have fallen to lows around $5 at the moment. Shares are still trading 90% below all time highs around $45 in 2004. Between 2008 and 2012, revenues have fallen from $8.0 billion to $7.2 billion in 2012. The company reported billion dollar losses in four out of the last five years, on the back of large impairment charges.

The deal of Rhythmia Medical, with an initial deal value of $90 million is relatively small for Boston Scientific. No financial details were released, unfortunately. In March of 2012, Boston Scientific already acquired Cameron Health for an upfront payment of $150 million. The deal value could reach $1.4 billion, contingent upon achievement of all milestones.

Investors in Boston Scientific are probably not too enthusiastic about the latest acquisition. The company has a very questionable acquisition track record, resulting in billion dollar write-downs over the past years. Despite the poor acquisition track record, management seems inclined to keep on making acquisitions. Value investors should stay away, management has not yet learned its lesson after a 90% decline in the share price over the past decade.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.