Boston Scientific Sticks to Solo Strategy as Peers Consolidateby
CEO Mahoney says research is more cost-effective than M&A
Company seeks ‘opportunistic’ deals such as Cosman purchase
Boston Scientific Corp. Chief Executive Officer Mike Mahoney says he’s happy resisting the consolidation craze sweeping the medical device industry, and will stay focused on internal research and development to maintain the company’s leadership position.
The approach seems to be working. On Thursday, the company reported sales that rose 10 percent to $2.1 billion in the second quarter, gaining in all three business segments and in every region. Medical and surgical products, an often overlooked unit, led the way with a 29 percent jump, bringing it level with contributions from older heart devices.
“We think category leadership is the best play, rather than just being as wide as possible,” he said in a telephone interview. “If you look at the companies with the highest multiples, it’s those with the strongest portfolios in the category.”
Investors have agreed. The stock rose 2.9 percent on Thursday and is up 41 percent in the last 12 months, outpacing competitors such as Johnson & Johnson and Abbott Laboratories.
There have been more than 600 acquisitions announced or closed in the health-care industry in the past 12 months, according to data compiled by Bloomberg, including rival Abbott Laboratories’ plans to buy both St. Jude Medical Inc. and Alere Inc. Medtronic Plc completed its $49.9 billion purchase of Covidien Plc in January 2015. Those deals were done to expand the companies’ product lines as hospitals increasingly push to buy medical devices less expensively and in bulk.
That isn’t Mahoney’s style, however. The company has made only one deal worth more than $1 billion in the last decade, the 2015 purchase of American Medical Systems and its urology portfolio for $1.6 billion, according to data compiled by Bloomberg. Most of his other purchases have been much smaller.
Mahoney, who said the Marlborough, Massachusetts-based company expects to generate $6 billion in free cash flow over the next three years, says he will continue to pursue acquisitions like Cosman Medical, a closely held maker of devices used to treat chronic pain that Boston Scientific purchased this week. His main emphasis, though, is internal research and development, where it will spend close to $850 million this year.
“We are always opportunistic about the companies we can buy, but we spend more internally,” he said. “It’s always important to have strong internal research and development capabilities, because we think that’s more cost-effective than acquiring companies all the time.”
That strategy seems to be working, said Jason McGorman, an analyst at Bloomberg Intelligence.
“They have such a strong brand name and recognition in cardiology, and they are taking a strategy of innovation, I think, that speaks for itself,” he said. “If they generate the $6 billion they expect over the next three years, they clearly have some capacity to work with. I think investors will expect them to be more active in M&A or share repurchases.”