Boston Scientific - Another Acquisition Despite Questionable Track Record

Nov.11.12 | About: Boston Scientific (BSX)

Shares of Boston Scientific (BSX) ended the week with modest losses of 1%. The developer and marketer of medical devices announced the acquisition of Vessix Vascular on Thursday.

The Deal

Boston Scientific announced on Thursday that it will acquire privately-held Vessix Vascular. Vessix has developed a catheter-based renal denervation system for the treatment of uncontrolled hypertension.

Renal denervation is a catheter-based therapy for medication-resistant hypertension. It uses radio frequency energy to disrupt renal sympathetic nerves as hyperactivity leads to uncontrolled high blood pressure.

Boston Scientific will pay an upfront payment of $125 million plus additional milestone payments which are maxed out at $300 million between 2013 and 2017.

CEO Mike Mahoney commented on the deal, "Hypertension is a major global healthcare challenge, affecting more than one billion people worldwide. Renal denervation represents a potential breakthrough therapy for the treatment of uncontrolled hypertension and is an important part of the Boston Scientific growth strategy. The acquisition of Vessic Vascular adds a second generation, highly differentiated technology to our hypertension strategy while accelerating our entry into what we expect be a multi-billion dollar market by 2020."

Both parties did not provide any financial details regarding Vessic Vascular. Vessic's technology has received the CE mark in Europe and TGA approval in Australia. The company expects to launch its product in CE Mark countries in 2013.

The company expects the net impact of the transaction to be negligible for 2013 and 2014 and break-even thereafter. Boston Scientific will determine the amount of acquisition and amortization charges in the fourth quarter.

Boston Scientific expects to close the deal in November of this year and anticipates that by acquiring Vessic Vascular it will own a second generation of treatment in an expected multi-billion market by 2020.

Valuation

Boston Scientific ended its third quarter of its fiscal year of 2012 with $352 million in cash and equivalents. The company operates with $4.25 billion in long term debt, for a sizable $3.9 billion net debt position.

For the first nine months of 2012, the company generated revenues of $5.4 billion. The company net lost $4.2 billion, after taking a $4.4 billion goodwill impairment charge. Boston Scientific guides for annual revenues of $7.2 billion, on which the company expects to lose between $2.86 and $2.89 per share on a GAAP basis.

The market values Boston Scientific at $7.1 billion. This values the firm at 1.0 times annual revenues. Adjusted earnings multiples are not applicable here, as acquisition costs and goodwill impairment charges are a structural costs for Boston Scientific, as a result of the company's acquisition-based growth strategy.

Currently, Boston Scientific does not pay a dividend.

Investment Thesis

Year to date, shares of Boston Scientific have fallen some 3%. Shares rose from $5.30 at the start of the year and reached highs of $6.40 during spring. Shares have fallen back since that point in time, exchanging hands just above $5 per share.

Long term shareholders in Boston Scientific have seen dramatic returns. Shares have lost nearly 90% of their value after peaking at $45 in 2004 and are trading at the lowest levels in the past decade. Between 2008 and 2012, Boston Scientific saw annual revenues fall some 10% from $8.0 billion in 2008 to an estimated $7.2 billion. The company reported large losses over the past years, predominantly related to acquisition related charges.

Boston Scientific typically pays its acquisition target an initial sum accompanied with additional contingency payments. In March the company bought Cameron Health, followed by the deal with Rhythmia Medical last month.

Investors are not too enthusiastic about the latest deal. The company's acquisition track record is very questionable. Shares have lost over 90% of their value over the past decade as the company took multi-billion write downs as a result.

I'd stay on the sidelines.

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.