Its stock is up 50 percent. Billion-dollar deals for breakfast. How did Boston Scientific get its mojo back?
“It’s been a brick by brick, constant improvement, strengthening the company."
The day after completing its latest billion-dollar deal, Boston Scientific dispatched food trucks to hand out fried chicken sandwiches and burritos to Silk Road Medical employees in California and Minnesota, before holding a town hall-style meeting to welcome them into the fold.
That September day was a big one for the teams at Silk Road, which makes stroke-prevention devices. But deals like this are a regular occurrence for Boston Scientific, and the Marlborough company has the process down to, well, a science. During chief executive Mike Mahoney’s 12-year tenure, Boston Scientific has completed more than 40 acquisitions, helping turn the medical device maker into one of the state’s most valuable companies.
This might be surprising considering the damage caused by its bet-the-farm, $27 billion deal in 2006 for pacemaker company Guidant, which sealed a victory in its bidding war against the larger Johnson & Johnson. That infamous merger saddled Boston Scientific with billions in debt and liabilities related to problems with Guidant’s devices.
Boston Scientific’s once-powerful mergers and acquisitions machine essentially ground to a halt, tanking the stock, prompting layoffs, and putting many other jobs at risk. By the time Mahoney, who was recruited by the Boston Scientific board from J&J, became chief executive in November 2012, the stock was at $5. The company was only worth about $8 billion — less than one-third of what it paid for Guidant six years earlier. Flash forward to today: Boston Scientific shares trade at around $90, and the stock market value has hit $130 billion. Only two companies in Massachusetts — Thermo Fisher Scientific and TJX — are worth more.
Rivals, of course, are trying to catch up. Boston Scientific faces intense competition from J&J, Medtronic, and Abbott Laboratories, particularly in the fields of electrophysiology (treating heart rhythm disorders) and interventional cardiology. However, perhaps the biggest challenge for Boston Scientific, which now employs about 50,000 people, could come from its own deal-making: As it gets bigger, more modest deals like the Silk Road acquisition often provide less of a boost proportionately to revenue and earnings because of the company’s increasing size.
For now, though, the story out of Marlborough remains focused on relentless growth: Revenue is expected to rise this year by 16.5 percent, clearing $16 billion. And with surging demand for two of its devices to treat atrial fibrillation, Boston Scientific’s stock has been on fire — posting a 50-plus percent increase this year alone.
“I’ve been here for 28 years,” said Arthur Butcher, an executive vice president who oversees the company’s Asian operations and its urology, endoscopy, and neuromodulation businesses. “There’s never been a better time to be here than now, with the momentum that we have.”
For over a decade before the Guidant bidding war, Boston Scientific had been an aggressive deal-maker. The pacemakers and defibrillators from that acquisition made Boston Scientific one of the biggest players in the cardiovascular sector. But victory came at a big cost: heavy debt and lawsuits over defective devices, not to mention a protracted legal battle with J&J.
“They extended themselves a little too far with Guidant, not only in terms of the price tag, but they ended up getting a closet full of skeletons,” said Debbie Wang, a Morningstar analyst. “Once they were able to stabilize things and bring that debt down, that put them in a good position to be able to make acquisitions again.”
Boston Scientific endured another ordeal for much of the 2000s, over surgical mesh products used for pelvic repair in women. The company, along with several others, resolved lawsuits filed by thousands of injured patients. Eventually, in 2021, it reached a $189 million settlement with multiple state attorneys general to change the labeling on its incontinence products, in part to clarify their potential risks.
Before Mahoney’s arrival, the company focused on dominating cardiology, Butcher said. But when Mahoney became chief executive after a year as president, he made it clear he wanted all eight company divisions to grow faster than their respective markets, and he was willing to invest in them all. Boston Scientific developed a system: Set aside 10 percent of revenue for research and development, including to advance already acquired technologies, and devote much of its profits to new deals. “Pretty much every dollar that the company earns, we reinvest back into internal R&D and technology acquisition,” Butcher said. “That’s a differentiator.”
The key was how to pick those acquisition targets. Mahoney implores his team to find ways to reduce costs for hospital clients, and to work with physicians to help solve their problems. In the case of atrial fibrillation, or “AFib,” doctors traditionally applied extreme heat or cold in a process called ablation to treat irregular heartbeats. The resulting scar buildup would block faulty heart signals, restoring the heart’s regular cadence. But physicians wanted a less damaging approach, with fewer side effects. For that reason, they embraced the company’s Farapulse device, which uses electromagnetic waves instead.
Boston Scientific plucked Farapulse from its own venture capital portfolio. With its venture capital arm, the firm makes small bets on younger companies — it has about 40 investments today — by buying minority stakes in them. That allows executives to closely track the startups, learn about their technologies, and often gain a presence on their boards, without putting too much money at risk, said analyst Rick Wise of investment bank Stifel. (With Farapulse, Boston Scientific held a minority stake until 2021, when it bought the rest amid promising trial results.)
David Rescott, a senior research analyst at the Robert W. Baird & Co. investment bank, said the firm’s deal-makers in recent years trained their sights on higher-growth markets. Before 2012, nearly half of Boston Scientific’s business grew by less than 4 percent a year. Now, nearly half of the company grows at more than 7 percent, he said.
That meant moving beyond drug-coated stents and pacemakers, product lines responsible for roughly half the company’s revenue before Mahoney became chief executive. Those lines are still important and growing, Mahoney said in an interview, but Boston Scientific is identifying faster-growing businesses in areas such as endoscopy, urology, and interventional cardiology therapies. The acquisition strategy now focuses on landing smaller purchases that augment existing business lines, instead of another big fish like Guidant.
“In hindsight, now, others are copying that strategy,” Bank of America analyst Travis Steed said. “They made a lot of small bets on things, a lot of them didn’t necessarily pan out, but some did and they’ve become huge growth drivers.”
Analysts also point to a shift in culture and mindset driven by Mahoney.
Mahoney said that change came about by recruiting new leaders and thinning out the bureaucracy to speed up decision making and simplify managers’ compensation incentives.
“It’s been a brick by brick, constant improvement, strengthening the company,” Mahoney said.
Can Boston Scientific keep this going? Analysts who track the company remain hopeful. But they also say rivals are not going to easily cede acquisition targets or markets to their competitor from Massachusetts. Boston Scientific executives need to be cautious about not overpaying, now that they can do big deals again. Investors’ expectations are high.
Mahoney remains confident. Employees are driven, he said, by more than quarterly earnings numbers. Boston Scientific regularly hosts patients at company facilities around the world to talk about how their lives benefited from its devices.
“We bring these patients’ stories that are very powerful right to our employees, [and] they see what we do every day eventually helps a patient,” Mahoney said. “Most employees don’t care about Boston Scientific’s stock price. They want to be proud of where they work.”
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