Full article reprinted from "The Gray Sheet" - November 17, 2008
It is not news that amid the current global financial crisis, individuals and companies alike are tightening their belts.
In the current climate, "It is only in almost rare instances that we get out our checkbook and write a check," Tobin said Nov. 12 at the Cleveland Clinic's Medical Innovation Summit in Cleveland.
"We have been spending $600 million a year for most of the 10 years that I have been involved in this thing," he said. But now "we are going to expect more from [small firms], and we are not going to overpay. The old days are over, and I don't think they are coming back."
In truth, Boston Scientific has emphasized sell-offs over technology acquisitions since well before the credit crisis mushroomed to its current level. The need to pay off the substantial debt created by the 2006 purchase of Guidant for $28 billion led the company to divest more than a billion dollars in assets in the past year (1"The Gray Sheet" June 23, 2008, p. 22).
But Tobin suggests that the Guidant debt is no longer the primary factor defining Boston Scientific's investment strategy. The debt has declined from $8 billion a couple of years ago to its current level of $5 billion, and it is "coming down practically every day," he said in Cleveland.
Even as that debt is paid, however, the worldwide financial outlook, along with increasingly potent regulations, has prompted Boston Scientific to "stop and really think about the way we do deals."
In the short-term, Boston Scientific will only consider firms that immediately contribute to top-line growth, the CEO said. In the longer term, the company is going to be more critical and science-based in identifying acquisition targets.
"The way we used to do things, I would characterize as opportunistic," Tobin said. "People would come and knock on our door. We would do some and not do others. It was actually kind of hard to discern a pattern to it. Now we are a little more strategic."
The firm recently divorced its finance team from its business development team. Business development is now linked with company scientists, and they have been told to "go out and find those opportunities where there are truly unmet medical needs," Tobin said. "Let's look at our catalog of technologies and ... figure out which of those might address those needs. If we don't quite have it, then we will do a targeted acquisition and fill in what we don't have. What that results in is many, many fewer deals."
Implantable device firms like Boston Scientific are often immune to economic ups and downs because most of their products are used in non-elective medical procedures. But the current far-reaching economic decline may be an exception, Tobin suggests.
"We are a global company [with] 40-plus percent of sales coming from outside of the U.S.," he explained. "Practically every economy I know of is being influenced by this. ... What that means is that our customers outside of the U.S., and inside the U.S. for that matter, are going to have problems paying; even governments are having problems paying. So this means that we have to be cautious with what we do with our cash."
Near-term expectations for increased regulatory requirements impacting efforts such as FDA pre-market review, physician-company financial relationships and clinical trial execution are further contributing to the company's more conservative position, he explained.
Tobin acknowledged that such policies at Boston Scientific and other large device firms will make it much tougher for start-ups, noting that other traditional sources of funding, including venture capital and initial public offerings, have also slowed tremendously.
"The IPO market is totally dried up," he said. "The problem with that is that was VC's exit strategy. If VCs can't exit then they are going to keep their cash."
"For small companies with great ideas who are running out of money, your options are few," he said. "The good news is that the traditional sources of funding will come back. They always come back. ... The trouble is, 'When?' It could be quite a while."
- David Filmore
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