S&P Affirms Ratings on Boston Scientific (BSX); Business Risk Raised to 'Strong'

Standard & Poor's Ratings Services today affirmed its ratings on Marlborough, Mass.-based Boston Scientific Corp. (NYSE: BSX), including its 'BBB-' corporate credit rating and senior unsecured rating. The outlook is stable.

"We revised our assessment of the company's business risk to "strong" from "satisfactory" given stabilization of revenues in the cardiology segments and the company returning to positive revenue growth," said Standard & Poor's credit analyst David Kaplan. We are also now incorporating the known litigation exposure primarily in our assessment of financial risk, whereas we had previously considered that within our assessment of business risk.

Our business risk assessment reflects the company's broad portfolio of market-leading medical devices used in diverse specialties, an expansive geographic footprint (48% of sales were outside the U.S. in 2013), limited competition, and high barriers to entry in these product markets. Our assessment of business risk also incorporates the rapid pace of technological change in these markets, and the potential for intensifying pricing pressure in the U.S. as adverse reimbursement trends continue to pressure profit margins at hospitals. Our business risk score for Boston Scientific is now comparable to that of the company's close peers.

Our rating outlook on Boston Scientific Corp. is stable. We expect low- to mid-single-digit revenue growth in 2014 and 2015, with the help of double-digit growth in certain smaller product and geographic markets. We expect internally generated cash flow to fully cover acquisitions and earn-out payments.

Given the company's ability to redirect free cash flow to increase cash balances or reduce debt, we believe it's unlikely that legal settlements would lead to a downgrade. We could, however, lower the rating if we believed an adverse legal judgment or additional reserves increase debt to EBITDA materially above current levels without the company establishing a clear trajectory of reducing leverage to below 4x within a two-year time frame. Given the current financial policy and our current performance expectations, the rating has limited capacity for additional debt.

We could raise the rating if adjusted debt leverage improves to less than 4x, which could lead us to remove the negative modifier. This could occur in 2015 if the current litigation issues are resolved overwhelmingly in the company's favor and/or if recurring legal and restructuring expenses subside, helping EBITDA margins increase by 300 basis points (bps). We could also upgrade Boston Scientific if it redirected free cash flow to reduce debt or increase cash balances.

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