CORRECTED – DEALTALK-Boston Sci’s ICD recall may result in asset sale

(Corrects paragraph three to remove reference to milestone
payment to Abbott. Abbott made the payment to Boston
Scientific)
(For more Reuters DEALTALKs, click [DEALTALK/])

* Impending liquidity crunch could lead to divestiture

* Pain management unit could fetch $1.2 bln-$1.6 bln

* J&J, Abbott Labs seen as most likely bidders

By Debra Sherman

CHICAGO, April 1 (BestGrowthStock) – Boston Scientific Corp (BSX.N: )
may sell its pain management unit to shore up capital after a
surprise recall and sales suspension of its implantable heart
defibrillators last month, industry experts say.

Already deeply in debt because of its controversial Guidant
Corp acquisition in 2006, Boston Scientific is faced with the
loss of an estimated $5 million in revenue every day it cannot
return to the market with its defibrillators, known as ICDs.

The company has $2.7 billion in payments due in 2011, and
recently made a payment to the U.S. Department of Justice to
settle charges that Guidant provided kickbacks to doctors
before being acquired.

Boston Scientific’s neuromodulation, or pain management,
unit had $285 million in sales last year and could sell for
$1.2 billion to $1.6 billion, according to Citibank analyst
Matthew Dodds.

“I don’t think anyone has an idea of what type of (market)
share will be lost as a result of the recall and with the
impact so uncertain, we think Boston will sell its
neuromodulation business,” Dodds said.

The unit manufactures implantable devices, much like heart
pacemakers, with wire leads that directly stimulate specific
areas of the spinal cord to treat chronic neuropathic pain.

Dodds sees Johnson & Johnson (JNJ.N: ) and Abbott as the most
likely bidders who would be interested in capitalizing on a
fast-growing market that Boston Scientific itself hasn’t
invested in sufficiently to reap benefits.

“Selling the neuromodulation business would get the highest
multiple, and it’s not particularly profitable for Boston, so
it makes sense if they want to raise money quickly,” said Jeff
Jonas, portfolio manager of Gabelli Health and Wellness Trust
Mutual Fund. “But they don’t absolutely need to do anything.”

More advanced applications of neuromodulation, which Boston
Scientific does not yet have, include what is known as deep
brain stimulation, or DBS.

DBS, one of the fastest growth areas in medical technology,
involves using a “brain pacemaker,” which is implanted in the
chest with leads threaded up into the brain.

The device sends electrical impulses to specific parts of
the brain to control movement disorders, such as Parkinson’s
disease, dystonia and tremor. Medtronic Inc (MDT.N: ) and St.
Jude Medical Inc (STJ.N: ) are leaders in that market.

Boston Scientific’s neurovascular intervention business,
which makes devices to treat vascular diseases of the brain and
generated sales of $348 million last year, is another potential
divestiture candidate, said Dodds. He figures it could fetch
$800 million to $1 billion.

A company spokesman declined to comment.

RECALL MAY FORCE CEO ELLIOTT’S HAND

When industry veteran Ray Elliott was named chief executive
last summer, he said he wanted to diversify Boston Scientific’s
offerings, expanding into women’s health products and other
areas. The shares, which had been depressed for years, bounced
when the company named Elliott CEO. He had total compensation
of $33.47 million in 2009, according to a proxy statement.

“It’s probably not his first choice,” said Tim Nelson, an
analyst with FAF Advisors, said of a potential unit sale. “This
ICD recall issue could be the catalyst that would force him to
consider such a draconian move. The longer this goes on, the
higher the probability he’ll have to do something to improve
liquidity.”

Boston Scientific is expected to refinance some of its
liabilities in the second quarter, “but the recall has put that
on ice,” Dodds said.

And even when the company is able to refinance, the debt
will likely cost more depending upon whether its credit ratings
are downgraded in the wake of the recall, he said.

In 2006, Boston Scientific agreed to pay some $27 billion
for Guidant, a maker of ICDs and stents, after a protracted
bidding war with J&J. Dubbed by Fortune Magazine the second
worst deal ever, Boston Scientific took on a mountain of debt
that has dogged the company ever since.

Soon thereafter, Boston Scientific had to recall some of
the Guidant products and then became the subject of a DOJ
investigation over their marketing. That has been settled, but
the company faces another government probe over the handling of
the latest recall.

Last month, Boston Scientific suspended sales of its ICDs
after failing to notify regulators of changes in how it
manufacturers the devices.

Analysts estimate Boston Scientific loses $5 million for
each day it cannot sell its ICDs. It posted $8.19 billion in
revenue last year, mostly generated by sales of ICDs and
cardiovascular devices like heart stents.

“Ray is like a good coach with a bad team,” Citibank’s
Dodds said. “You can only coach the players you have. Ray likes
a challenge and this is a challenge, though it’s probably a
tougher challenge than he realized.”

Investment Advice

(Reporting by Debra Sherman; editing by Michelle Gershberg,
Bernard Orr)

CORRECTED – DEALTALK-Boston Sci’s ICD recall may result in asset sale