To the victor go the spoils, or so it's said. Unfortunately, Boston Scientific's (NYSE:BSX) success in winning Guidant from the clutches of Johnson & Johnson (NYSE:JNJ) has so far only spoiled billions of dollars in shareholder capital. Management is still optimistic it will have the last laugh, but when might that be?
Not anytime soon, it appears. Management said it best when it released 2006 results on Thursday: "For 2007, the company has concluded that forecasting the rate of growth in the cardiac rhythm management market and the drug-eluting stent market will be difficult, given the events and volatility in both markets during 2006. Since these two markets are so significant to the company's forecasted results of operations in 2007, the company believes it is appropriate to provide guidance only for the first quarter."
In other words, it doesn't know whether this year will finally halt its loss of market share from product recalls and safety warnings that occurred while Guidant was being acquired. Also, concerns over whether the use of drug-eluting stents leads to increased heart attacks have hurt sales of Boston Scientific's flagship Taxus stent. The overall uncertainty keeps the stock hovering near its 52-week low and caused ratings agency Moody's (NYSE:MCO) to lower its outlook on Boston Scientific bonds to negative from neutral on Friday.
Moody's is worried about the industry's lack of operational visibility and its cutthroat competition, which includes health-care heavy hitters such as Johnson & Johnson, Medtronic (NYSE:MDT), and Abbott Labs (NYSE:ABT). That's not the kind of competition you want to face with merger integration concerns and close to $9 billion in long-term debt from the acquisition.
I wish I had more specifics to pass along, but the 2006 results included a number of merger-related charges, tax benefits, and other costs that make it difficult to discern just how profitable Boston Scientific is now. Cash flow details will help once the company files its 10-K, lending insight into the company's cash-generating capabilities without all of the GAAP-related accounting issues necessary to integrate a major acquisition.
In the meantime, investors can count on management to tell them when the "growth story at Boston Scientific will continue." For the time being, it appears that everyone, company included, is in the dark as to when that might happen. It would probably be easiest to file this into Charlie Munger's "too hard" basket and focus on a business that is more straightforward and easier to understand. However, the shares' roughly 60% drop from their pre-acquisition prices makes me think most of the downside is already priced into them.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.
