After stumbling big, Boston Scientific has regained its stride

Four years ago, Boston Scientific Corp. hit rock bottom.

Stock in the major Minnesota employer was at its lowest point ever, capping a six-year span that saw Boston Scientific shed 78 percent of its market value in the wake of its disastrous acquisition of Guidant Corp., a maker of heart devices in Arden Hills.

By July 2012, Boston Scientific was preparing to elevate its fourth CEO in five years. And the person selected for the job — Mike Mahoney, the former head of Johnson & Johnson's medical device division — was not impressing the experts.

"When they first held their analyst meeting after he became the CEO, I thought, 'This is never going to work,' " BMO Capital Markets analyst Joanne Wuensch said.

At a recent company meeting with analysts, however, assessments had changed. "It was a completely different company," said Wuensch. "You looked around the room, and the investors believed."

Four years since hitting its nadir, Boston Scientific looks like a company on the move.

Although net income remains stuck in the mud, the company's closely watched currency-adjusted revenue and adjusted operating margins are growing quickly and are forecast to continue moving up. Last week, the company upgraded its earnings guidance for the year. This month, the company reported potential settlements in 19,000 product-liability lawsuits and a favorable settlement with the Internal Revenue Service to resolve a 15-year-long dispute regarding more than $1 billion in disputed back taxes.

"We're not talking about the turnaround anymore," Mahoney said in an interview this month in Minneapolis. "The first goal was to turn around the company, stabilize it, and then focus on high performance, which we define as growing faster than our peer group and delivering greater shareholder return. And we've been doing that for the past three years."

Boston Scientific generates about two-thirds of its revenue from products made by divisions located in the Twin Cities area. With 60 percent of the company's U.S. workers here, some have joked that it should call itself Minnesota Scientific. "We're not going to change the name," Mahoney said. "But the heartbeat of Boston Scientific is in Minnesota, for sure."

In the three years before 2013, Boston Scientific's organic sales declined by an average of 3 percent a year, excluding the effects of foreign currency changes and business acquisitions. For the years 2013 to 2016, the company is on pace for annual organic sales growth of about 5 percent.

The stock is a hit with analysts. All 28 tracked by Thomson Reuters rate it a buy. The last "sell" recommendation was nearly two years ago.

One key statistic Mahoney has not turned around is Boston Scientific's straight profit, as measured by generally accepted accounting principles (GAAP).

Since 2006, the company has reported just one year of positive GAAP net income ($441 million profit on $7.6 billion in revenue in 2011). Last year, Boston Scientific posted a net loss of $239 million on $7.5 billion in revenue.

Those figures are freighted with several large expenses that analysts typically strip away to examine a company's deeper performance, such as restructuring costs, litigation charges and the like. Stripping away those items, Boston Scientific has posted two consecutive years of double-digit growth in its adjusted net income.

Looking ahead, the company increased its revenue outlook for the current year to at least $8.3 billion, up 11 percent on an operational basis. Meanwhile, adjusted earnings per share are projected to rise 15 percent this year.

"I think the turnaround has been cemented," Piper Jaffray analyst Brooks West said.

Although plans to turn around the company's performance were underway when Mahoney became CEO, the positive results of those changes have all happened on his watch.

Mahoney, 51, became president of Boston Scientific in October 2011 and spent the next year managing the Minnesota-based cardiac-rhythm device division. Although executives always intended to appoint him CEO as well, a noncompete clause in his contract with former employer Johnson & Johnson kept him out of that job until late 2012, which he said gave him time to study a company in sore need of changes.

To observers, it was far from clear at the outset that Mahoney was the person for that job.

"A lot of people, myself included, when we saw Mike and met Mike, everybody liked him. But there were questions on whether the founders were going to let him actually run the company," West said. "We were also at a time when the underlying markets were not growing."

The main reason why the 2006 Guidant deal was so damaging was because Boston Scientific, spurred on by a bidding war with Johnson & Johnson, paid far too much to acquire a company that made heart devices in a product category that was not growing. Before the deal, people at Guidant also concealed problems with defibrillators made in Arden Hills, forcing Guidant LLC to plead guilty to misdemeanors and pay $254 million in criminal fines in 2011.

Stuck with that history, Mahoney said he set out to quickly address problems that seemed systemic, like what he saw as an "overly analytical" decisionmaking process that left the corporation slower and less agile than it could be.

He started to shake up his management team, which he described as having too many layers separating ideas from action. The company used quick acquisitions, streamlined decisionmaking and ramped-up research spending to create a diverse slate of fresh, bankable products.

One key product was the Watchman, a Minnesota-created heart device that closes off a portion of the heart where deadly blood clots form. Another is the Lotus, Boston Scientific's entrant in the fast-growing niche of artificial aortic heart valves that can be implanted without open-heart surgery.

A third is Synergy, a drug-coated coronary stent that is unique because the polymer that conveys the drug is also rapidly absorbed by the body, reducing post-procedural inflammation. Boston Scientific also sells an implantable defibrillator called the Emblem S-ICD that doesn't need to directly touch the heart.

Stock analysts noted the pace and diversity of such innovations, which came in the context of a multiyear companywide efficiency initiative and a concerted effort to expand sales and employee counts outside the U.S.

In interviews, Mahoney stresses the importance of instilling a "winning spirit" in employees, which he said has a cascading effect that has led to the dramatic change in Boston Scientific's growth profile, international efforts and stronger financial returns.

"If you get the people right, and the pipeline right, the company runs well," he said.

Things have gone so well, in fact, that Boston Scientific is again seen as a possible acquisition target, an issue Mahoney declined to address.

The company recently has worked to cut down on litigation risk, including paying a $600 million settlement last year to Johnson & Johnson to resolve a $7 billion lawsuit in which Johnson & Johnson claimed it was damaged by losing the right to acquire Guidant a decade earlier.

Meanwhile, Boston Scientific, like Johnson & Johnson, continues to simultaneously fight and settle lawsuits from thousands of women who say they were injured by its pelvic-floor mesh products to treat the common medical problems of urinary incontinence and pelvic organ prolapse.

Last week Boston Scientific announced potential settlements with about half of the 40,000 women suing it over injuries allegedly caused by pelvic mesh products, and it is investing in trial work to generate more clinical evidence.

"Clearly, there have been some outcomes that were unfortunate, and we've paid those [lawsuits] as appropriate and settled those," Mahoney said. But hundreds of thousands of women have had successful outcomes from mesh surgery, and "we know that in the right hands, with the right product, it's a highly successful outcome for most patients."

Joe Carlson • 612-673-4779