Devices & Diagnostics

Is Boston Scientific selling the wrong business to Stryker?

Boston Scientific Corp. (NYSE:BSX) finally pulled the trigger Thursday, saying it would sell a major business to Stryker Corp. It just wasn't the business Wall Street was expecting it to sell.

Boston Scientific Corp. (NYSE:BSX) finally pulled the trigger Thursday, saying it would sell a major business to Stryker Corp. (NYSE:SYK).

It just wasn’t the business Wall Street was expecting it to sell.

In a surprise move, Boston Scientific said it would sell its neurovascular unit to Stryker for $1.5 billion. For months, analysts expected the medical device giant to divest its neuromodulation business.

Boston Scientific CEO Ray Elliott said the sale will help the company refocus its sprawling operations and provide much needed cash to make acquisitions and pay down debt.

“The sale of our Neurovascular business is part of our overall strategic plan that will refocus our portfolio to, amongst other criteria, leverage existing sales forces with least invasive, cost and comparatively effective medical devices that reduce or eliminate refractory drug regimens,” Elliott said.

Plagued by its ill-fated $26 billion acquisition of Guidant Corp. and several regulatory problems, Boston Scientific has been trying to reverse its long sales decline. Earlier this year, the company restructured its organization, combining its cardiovascular unit in Maple Grove with its cardiac rhythm management business in Arden Hills.

Divesting some operations makes sense. But some analysts think Boston Scientific sold the wrong business to Stryker.

“We think it is a net negative, strategically,” David Lewis, an analyst with Morgan Stanley, wrote in a research note. “This business was profitable and poised to improve post product cadence, and Boston had expertise in endovascular.”

“We favored Boston exiting the neuromodulation business, where margins are non-existent and required investment in clinical trials is high,” he said.

Given its vast experience in vascular markets, including heart and peripheral-related technology, neurovascular (devices that prevent strokes) seems to be a closer strategic fit to Boston Scientific than neuromodulation.

Boston Scientific entered the neurovascular business with its $1 billion purchase of Target Therepeutics in 1997. The person who oversaw the acquisition was Joe Fitzgerald, a fast rising executive who now is president of the Minnesota-based endovascular unit, which includes neurovascular, and a member of the company’s executive committee.

And while Boston Scientific is leaving the neurovascular business, other large medical device competitors are trying to get into it.

Johnson & Johnson recently paid $480 million to buy Micrus Endovascular Corp. Covidien plc., an Irish medical device company, and shelled out $2.6 billion to acquire ev3 Inc. in Plymouth, Minnesota, which makes devices to treat peripheral and neurovascular diseases.

On the other hand, neuromodulation is one of a few Boston Scientific units that has been growing sales. The company said third quarter neuromodulation revenue grew 9 percent to $79 million while neurovascular fell 7 percent to $79 million.

Still, neuromodulation is arguably a tougher business, with higher regulatory hurdles and tougher competition. Boston Scientific lags behind competitors like St. Jude Medical Inc. (NYSE:STJ) in Little Canada, Minnesota, and Medtronic Inc. (NYSE: MDT) in Fridley, Minnesota, especially in deep brain stimulation (DBS).

Medtronic is the only company selling FDA-approved, rechargeable DBS devices in the United States. That company also won regulatory approval to market its Activa DBS devices to treat advanced Parkinson’s and epilepsy.

A major study published earlier this year in the Journal of the American Medical Association concluded that Medtronic’s DBS devices worked just as well as drugs in improving the quality of life of patients suffering from Parkinson’s.

And St. Jude is actively exploring the use of neurostimulation devices to treat headaches.

Of course, Boston Scientific could sell neurmodulation in the future, as some analysts expect the company to do.

And while Boston Scientific has strong experience in neurovascular, the company’s recent $193.5 million decision to buy Asthmatx, Inc., a maker of catheter-based systems to treat asthma, shows Elliott’s willingness to enter faster-growing markets where his company has no presence.

Those two decisions — the sale of neurovascular and the purchase of Asthmatx — could define Boston Scientific’s strategy for years to come.

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