Wednesday, August 18, 2010

Interesting Rumors Around Boston Scientific

It sounds like there are some interesting rumors bubbling up around Boston Scientific (NYSE: BSX) these days. With the stock in the toilet and little momentum in the business (but plenty of debt!) I am sure management is fielding quite a few "do something!" calls from our lovely and ever-so-patient friends in Hedge Fund-Land.

The first rumor is that BSX is about to sell its neurostim business to Stryker (NYSE: SYK). I saw this rumor in Bloomberg this morning, and talked with some friends in the industry. It all seems to make a fair bit of sense to us.

First, BSX has bigger fish to fry in its stent and CRM businesses, and has not really been doing all that great against Medtronic (NYSE: MDT) or St. Jude (NYSE: STJ) in that (neurostim) market. Like so many other niche businesses at BSX, this one too has suffered from neglect and under-investment.

For Stryker, this would offer another business platform and access to a market that has decent underlying growth. Now, I think the "synergy" that Bloomberg mentioned between Stryker's spine business and neurostim is a little silly (yes, back pain is a big indication for neurostim, but they do not go together quite so tightly), but the deal still makes sense. I happen to think that Stryker wants to add some more businesses to its portfolio, and most of the exciting ideas like Intuitive Surgical (Nasdaq: ISRG) or Nuvasive (Nasdaq: NUVA) are rather pricey.In buying BSX's neurostim business, Stryker could be getting an underappreciated fixer-upper that delivers good growth with just a little care and reinvestment.

Beyond the neurostim business, BSX is also apparently looking to jettison the neurovascular business. BSX has a very good franchise in treatments for cerebral aneurysms like embolization coils and they have been a major player for a number of years. This is interesting timing given that Johnson & Johnson (NYSE: JNJ) recently announced a deal for Micrus Endovascular (Nasdaq: MEND) - one of BSX's up-and-coming rivals.

What is BSX telegraphing here? Is the company saying, in effect, that only BSX's superior marketing abilities and long-term customer relationships were keeping them afloat and that MEND's products in the hands of JNJ's salesforce is too overwhelming to fight?

That is probably hyperbole, but it is an interesting development nonetheless. So who might buy this business? I would think Medtronic or St. Jude might give it a courtesy sniff, but I would expect the likes of Cook or Bard (NYSE: BCR) to be the more logical candidates right now. But who knows? Covidien (NYSE: COV) is out there buying every other damn thing, so maybe they will take a look too.

All in all, these are interesting developments at BSX. Does this mean the company is really circling the wagons and choosing to focus on major product categories like stents and CRM? Or is this just a process of cleaning out a few under-performing (but still marketable) businesses where a recovery is unlikely?

I am not sure yet, but I would keep a close eye too on whether they jettison the IVUS business. A sales of that business to a motivated buyer (like, say, GE (NYSE: GE) or Siemens (NYSE: SI)) would be bad news for Volcano (Nasdaq: VOLC). Volcano has great technology (the best, actually) and products, but they have clearly also benefited from BSX's unwillingness to support and develop the business any further. A sale to a new rival, then, would be a clear threat.

At the end of it all, though, I still would not be a buyer of BSX. But then, I am sort of accustomed to not liking BSX, so I do not pretend to be unbiased.

Disclosure - I own shares of JNJ

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