BOSTON SCIENTIFIC CORPORATION
Host: Larry Best
June 29, 2001/12:30 p.m. CDT
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BOSTON SCIENTIFIC CORPORATION
June 29, 2001
12:30 p.m. CDT
Moderator Ladies and gentlemen, thank you for standing by.
Welcome to the Boston Scientific Corporation
conference call. At this time all participants are in
a listen-only mode. Later we will conduct a question
and answer sessions. Instructions will be given at
that time. As a reminder, this conference is being
recorded.
I would now like to turn the conference over to the
Chief Financial Officer of Boston Scientific, Mr.
Larry Best. Please go ahead, sir.
L. Best Thank you and good afternoon. The purpose of the call
today is to address our announcement earlier today of
the acquisition or the agreement, definitive
agreement that we reached with Cardiac Pathways to
acquire Cardiac Pathways. On the call today with me
we have Tom Cohen, who is our President of EP
Technologies, a division of Boston Scientific; we
have Paul Laviolett, who is the Senior Vice President
with Boston Scientific
BOSTON SCIENTIFIC CORPORATION
Host: Larry Best
June 29, 2001/12:30 p.m. CDT
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and also President of our Cardiovascular Division and
franchise. We're pleased to have Tom Prescott who is
the Chief Executive Officer of Cardiac Pathways, who
we've worked very closely with over the last several
weeks and months to accomplish what we announced
today.
I will have some brief prepared remarks, I'll turn it
over to Tom Cohen to go over strategic rationale.
Paul Laviolett will also add his commentary on the
strategic direction of our cardiovascular business as
it relates to our EP business. Then we'll ask Tom
Prescott to talk a little bit about how he sees this
combination and the advantages of it.
Before I go forward, I'll ask Paul Donovan, our
Senior Vice President of Corporate Communications to
read the Safe Harbor clause.
P. Donovan Thank you, Larry. This conference call contains
forward-looking statements within the meaning of the
Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995. Boston Scientific and
Cardiac Pathways wish to caution participants that
actual results may differ from those discussed in the
forward-looking statements and may be adversely
effected by, among other things, the inability to
obtain or meet conditions opposed for regulatory
approvals; the risk that Boston Scientific and
BOSTON SCIENTIFIC CORPORATION
Host: Larry Best
June 29, 2001/12:30 p.m. CDT
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Cardiac Pathways' businesses will not be integrated
successfully; risks associated with new product
development and commercialization; clinical trials,
competitive offerings, each company's overall
business strategy and other factors described in each
company's filings with the Securities & Exchange
Commission.
L. Best Thank you, Paul. Let me begin.
Boston Scientific and Cardiac Pathways Corporation
today announced the signing of a definitive agreement
for Boston Scientific to acquire Cardiac Pathways in
an all cash transaction for a purchase price of
approximately $115 million or $5.27 per share. The
transaction, which will be accomplished by a cash
tender offer and a follow on merger, is expected to
close in the third quarter of 2001. The tender offer
for the common shares of Cardiac Pathways is expected
to commence in early July and is conditioned upon
approval by regulatory authorities and other
customary conditions. Management and certain
stockholders of Cardiac Pathways, holding the
majority of Cardiac Pathways voting securities, have
agreed to support the acquisition by tendering their
common shares into the tender offer or selling their
securities to Boston Scientific. The Cardiac Pathways
Board has unanimously voted to recommend the tender
offer. Boston
BOSTON SCIENTIFIC CORPORATION
Host: Larry Best
June 29, 2001/12:30 p.m. CDT
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Scientific expects the acquisition to be modestly
dilutive to earnings in 2001.
This acquisition can be put in the category of
another acquisition that is driven by Boston
Scientifics' goal of continuing to lead globally the
area of interventional medicine, primarily based on
catheter-based therapies. We're very proud and
excited about the Cardiac Pathways combination into
Boston Scientific.
Let me give you some perspective on the financial
side of this. We're very enthusiastic about the
technology platform that the employees of Cardiac
Pathways has built over the past several years, both
their Chilli Catheter that you'll hear more about and
their localization/navigational technology.
We think that by combining that business with Boston
Scientific and joining the two teams, incremental
revenues in 2002 should approach somewhere in the
neighborhood of $22 million. In 2003, we hope to see
that incremental revenue grow to close to $35 million
in incremental revenues. The gross margins on this in
the early areas on this incremental business will
range in the 50-60% of sales.
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June 29, 2001/12:30 p.m. CDT
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We expect in the integration phase in 2001, after
closing, that the transaction will have somewhere in
the neighborhood of one cent dilution to Boston
Scientifics' 2001 EPS. We hope in 2002 that we can
neutralize the transaction, but if we do achieve
goals of $22 million incremental, it probably will be
somewhere between neutral to a penny a share
dilutive. And, of course, we're hoping to do better
than $22 million, but the $22 million seems like a
good estimate at this point.
Now, what does that mean to EP Technologies? The
combined division of EP Technologies in 2002, our
goal is to see sales in excess of $125 million on a
combined basis and in 2003 we hope to see that move
up handsomely to a sales number of approximately $165
million to $170 million, with gross margins in the
60% range. The combination of these two companies we
think provides a clear leadership position in the
therapeutic side of catheter-based ablation.
Now, the transaction is a cash transaction. It's $115
million in cash. At the time of closing, we expect
that Cardiac Pathways in their balance sheet will
have somewhere between $15-20 million in cash.
There's also $30 million in net operating loss carry
forwards that we think are useable. The
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net present value of those to Boston Scientific is in
the neighborhood of $5 million. So we're looking for
net of our cash transaction somewhere in the
neighborhood of $15-20 million in cash with $5
million net present value of the NOL. That's factored
into our valuation model and the decision to move
forward.
Let me now turn it over to Tom Cohen, President of EP
Technologies, who has really led the charge here to
embrace this transaction. He'll try to give you his
strategic vision for EP today and going forward. Tom?
T. Cohen Good morning, good afternoon. We just finished
meeting with our folks over at EP Technologies and
the organization, it's fair to say, is quite jazzed
about the planned acquisition. We're also very
excited about the investment that BSC is making in
our business and in our future.
The strategic rationale, principally, revolves around
two key products or technology platforms at Cardiac
Pathways. The first one is an ablation technology.
The product is called the Chilli. It is a patented,
fluid Cooled Ablation System. The value of a fluid
Cooled Ablation System is the ability to create
larger, deeper lesions, which are particular
important in areas such as ventricular tachycardia
ablation.
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By virtue of their VT approval, Cardiac Pathways now
brings a new indication to our portfolio as well as
representing a market exclusive today. The Chilli
Catheter is the only fluid Cooled Ablation System
available in the United States. We expect that that
will be the case for some time to come yet. We think
that this product has tremendous opportunity for
expansion in the future in treating more complex
arrhythmias of ventricular tachycardia, of atrial
flutter and atrial fibrillation.
The second technology is the RPM Realtime Positioning
Management System which is a fully integrated
recording, mapping system and catheter navigation
based on ultrasound technology. The RPM system allows
us to navigate catheters in 3D space without the use
of fluoroscopy with pinpoint accuracy. The RPM
technology is in the initial stages of introduction
into the marketplace. Clinicians are quite excited
about this. We at EP Technologies have been working
toward the integration of a navigational localization
technology into our market leader Blazer product for
some time, but this really accelerates our time to
market significantly as the RPM System is current
available and it is on the Chilli Catheter as well.
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So those are the two key rationale for moving forward
with this. So, really in quick summary fashion, we
believe the combination of the two organizations will
greatly accelerate our sales and profit picture. They
are an exciting new technologies to the clinicians
out there. They are aimed at complex arrhythmias,
which is really the fastest growing segment of the EP
Ablation business today and into the foreseeable
future. The combined R&D organizations, as Cardiac
Pathways brings in new core capabilities to us, is
very complementary. It strengthens our leadership
position in the therapeutic market. It provides us,
we feel, technological leadership in the two very
important areas of large lesion generation as well as
3D navigation/localization. And as you look at the
combined intellectual property portfolio, it's most
impressive at over 300 issued patents.
P. Laviolett Thanks, Tom. I just want to spend another minute
commenting on the broader cardiovascular perspective
and what role electrophysiology plays now for Boston
Scientific. As you're well aware, we provide products
in interventional cardiology, peripheral vascular
intervention, interventional neuroradiology and
catheter-based electrophysiology. And within that
group, electrophysiology is today our fastest growing
segment. It maintains a growth rate today in excess
of 20% and we certainly anticipate
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this combination will add an acceleration to that
growth over time, primarily because of the increased
reach we'll have in the faster growing segments of
catheter-based electrophysiology, the combination of
indications that the two companies provide, and the
overall acceleration to procedural growth that these
technologies ultimately enable.
I think this is also a clear statement in our belief
in catheter-based interventions for Rhythm
Management. We see an increased logic in the pairing
of interventional cardiology and electrophysiology as
catheter-based therapies become more and more
accepted and more and more definitive. That is
enabled significantly by the technology available in
sophisticated navigation and definitive therapies as
provided by ablation procedures from Cardiac Pathways
and EPT Technologies.
Tom has alluded to some of the synergies and
technology leverage available. Clearly, the sales and
marketing reach of Boston Scientific's Cardiovascular
organization will stimulate growth. We have a
combined presence now in the United States that's
impressive. But perhaps, more importantly, the
international distribution reach made available
through these technologies through Boston Scientific
Worldwide will clearly be of benefit. We've got now
increased combinations in installed capital
BOSTON SCIENTIFIC CORPORATION
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equipment base, sales force and clinical specialist
capabilities, development capabilities and clearly
adding navigation qualities to a large catheter
business and perhaps most importantly, a great set of
people from Cardiac Pathways joining a great set of
people at EPT. So we feel there's a great list of
operating synergies, technology, leverage, fueled in
part by the inherent growth in EP, the incremental
segment growth that we're focused in, and the
broadest combination of interventional cardiology and
catheter-based electrophysiology available in the
industry.
Let me turn it over to Tom.
T. Prescott Thanks, Paul. I guess if you just listened to that,
you've heard three different people describe what
sounds like a very complementary, strategic fit; one
where we're connecting outstanding technologies,
especially that we've been able to accelerate over
the last couple of years with a refocus on
commercializing these technologies that had long been
inside the walls of Cardiac Pathway; having the
opportunity for this team to connect those
technologies with the tremendous resources at Boston
Scientific was an overwhelming factor in one of our
desires to go forward and certainly played heavily in
Boston Scientific's decisions about what this was
worth to them.
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We're very excited about it. We've looked at them as
the team to beat in ablation. They've had the best
products, the best support, the best field team out
there. And when we've thought about who we had to go
head to head with, they were right up there. So, I
think there's virtually no product overlaps. This
provides an opportunity to accelerate Chilli growth
and it provides an opportunity to dramatically
accelerate the adoption of RPM.
The second thing that seems really compelling here is
there's real excitement here with our employees. And
many times with acquisitions, there seems to be a
winner and a loser. This is clearly a case where we
have a company in Boston Scientific that has a strong
commitment to the Silicon Valley and to the San
Francisco Bay area, both in terms of yielding
innovation and new products and new technologies as
well as substantial manufacturing network. Many of
our employees have either spent time at either Target
facilities or at EPT, so Boston Scientific is looked
at as an employer of choice. So whether this is a
person in operations that is a skilled assembler,
whether this is a software engineer, this is clearly
not an example where people need to be immediately
worrying about their jobs. This provides great
opportunities for our employees to grow. And as the
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Host: Larry Best
June 29, 2001/12:30 p.m. CDT
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plans play out here and this thing gets finished and
the integration gets underway, I believe there's
going to be great opportunities for employees and
great opportunities for technologies to be
accelerated. And at the end of that day what that
really yields is better tools for our physicians and
better treatments for our ultimate customers, the
patients.
I guess that takes me to the last thought and that is
that Cardiac Pathways has been around since '91 and
it's had a very technology-centric focus. The work
we've done over the last couple of years to get the
company really headed towards commercialization of
some of this great technology. The things that we
worked so hard at as a small company are the things
that Boston Scientific does very, very well. And so I
think the overwhelming opportunity here is to connect
this great technology with these resources. And in
most cases, both in terms of the Chilli platform as
well as RPM and some of the things that the market
hasn't seen, the sky's the limit, I think, given the
commitment, the overall strategic plan for Boston
Scientific and the desire to provide great products
for other customers, the interventional cardiologists
and EP physicians. So I really think that they're
just starting to scratch the surface and we're very,
very excited at this end to become part of the Boston
Scientific family.
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June 29, 2001/12:30 p.m. CDT
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L. Best Thank you, Tom. Thank you, Tom and thank you, Paul.
Let me turn it over for questions at this point.
Moderator Our first question comes from Tim Lee with Merrill
Lynch.
T. Lee Just a couple of questions. In terms of the revenue
projections, can you kind of give us a sense of the
mix between the Chilli and the RPM on that front?
Second, on the Chilli, even though it's indicated for
VT's, it's my understanding that there's quite a bit
of off label flutter use. Can you kind of give us a
sense of how large the a-flutter market could
potentially be?
L. Best Obviously we're not going to address off-label use to
any great degree, but, Tom, do you want to address
that questions first and I'll follow up?
T. Cohen Tim, in terms of the mix between RPM and Chilli
sales, you can't really think of them as RPM being
the instrumentation side and Chilli being the
catheter side, there is already a convergence of
those technologies. So a Chilli catheter that has the
ultrasound transducers placed on them is basically
considered a Chilli RPM catheter. So our plan really
here is to drive the catheter sales. As you well
know, selling instrumentation capital equipment is
not the easiest thing in the US market. There are a
number
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of ways that you can approach that. But the primary
focus here will be how can we get RPM installs to
help drive the catheter sales. I might ask Tom to
elaborate on that a little bit since they've been the
architect of that strategy, but specifically we're
looking at transitioning from straight Chilli non-RPM
sales to Chilli with the RPM navigation capability on
it. But the predominant sales will be coming from
catheter sales and not from instrumentation sales.
T. Prescott It's a great set up, Tom. Tim, the specific pattern
we're seeing, first of all, almost all of our revenue
today is catheters, is disposal streams of catheters.
We have very little equipment revenue in our base.
What Tom just described is starting to happen in
higher volume accounts. And in fact, many times when
these doctors get into these cases, they get into a
case, it becomes difficult, they start escalating the
technology they're using to address that case and
they start pulling multiple catheters off the shelf
and they're per case cost goes up. And so what we're
starting to see is, while there's even a question
about a case being more complex or difficult, we have
some accounts that are literally putting in a Chilli
RPM to start with as the primary ablation tool in the
even they decide they need to start to use RPM in the
case. ...in the case, the only thing they have to do,
the only incremental cost is the less expensive
diagnostic catheters
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equipped with the RPM technology they then slip in
and then they set up the RPM system. So the idea for
them, and I think as I've understood the plan, they
want to make it as easy as possible for the clinician
to scale the level of treatment to the case. I think
as ultimately the technology platforms get merged and
this technology is available with their tools, the
Blazers, the other diagnostic tools, that just
becomes easier and easier for the clinician to make
happen.
T. Lee As a quick follow up. The one on the flutter side,
can we anticipate a clinical trial for a-flutter
indication? And second, on the RPM front, what's your
current install base?
L. Best I'll let Tom answer the install base. Let me get back
to you here, Tim, on the size of the a-flutter market
as we have sized it up on a worldwide basis right
now. We estimate that approximately 20% of all the
ablations done on a worldwide basis are for atrial
flutter and that's growing at about 25% per annum. So
it's actually the fastest growing segment of the
total ablation market.
As far as the off-label use, it's not appropriate, I
addressed that; however, we will be looking at plans
for whether or not it would make sense for us
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to go forward with Chilli in an atrial flutter
clinical trial as we currently have a system in
clinical trial for atrial flutter as well. So we are
hopeful of receiving an indication for atrial
flutter. So I'm not trying to dodge your question, we
haven't spent a lot of time thinking about that at
this stage.
T. Cohen The other thing to note is that Tom Prescott and the
Cardiac Pathways team achieved just under $7 million
in sales in their fiscal 2000 operating year and they
most likely will end this fiscal year with over $13
million in sales, so almost a doubling of sales in
the last 12 months by Tom and his team.
We think by just putting this momentum into EPT and a
broader sales and marketing force that it certainly
is realistic to think we could move $13 million base
up $9 million to around $22 million in the next 12
months. We'd like to think that's a conservative
goal, but there's much to be done here in integrating
the two platforms and the two teams.
Moderator Our next question is from Mike Weinstein with JP
Morgan.
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M. Weinstein Help us out. I guess it wasn't clear from our
standpoint on how there's not a fair amount of
overlap on the RF catheter side, given the rather
parallel tracks for pursuing AF and flutter over the
last couple of years. Maybe you can walk us through
that better.
L. Best Let me try to tee up that first. First, the majority
of Boston Scientific EPT business today is focused on
therapeutic as opposed to diagnostics. In the
therapeutic market our principle focus has been the
SVT market. Second focus has been atrial fibrillation
and most of our dollars and cents have been put into
the a-fib market.
Cardiac Pathways has put a lot of their money and
effort into, first, the treatment of VT. Their
approval is a VT approval and a different segment
than a-fib or a-flutter. So there's multiple growth
markets here. Cardiac Pathways first went for an
approval on the VT market and Boston Scientific has
gone to SVT and then into a-fib. So it really is not
much overlap, but far more complementary technology
in terms of the platform.
M. Weinstein I thought, as I understood it, most of the research
efforts, and maybe I'm out of date here, at both
sides in the last 2-3 years have been on the AF side
of the business. Maybe you can just clarify whether
work is as well
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on pulmonary vein ablation and the efforts of both
companies on that front.
L. Best Let me clarify again. Cardiac Pathways does not have
a clinical trial today that I'm aware of on
a-flutter. We have a clinical trial on a-flutter. So
the clinical paths are complementary, not
overlapping.
Now on the pulmonary question, Tom or Tom?
T. Cohen On the pulmonary focal a-ablation, we are moving
forward with vigor on our development program. We
believe that we have a good design, it's a different
design, I'm not at liberty to discuss it, and we are
hopeful of filing our IDE in the fourth quarter of
this year to become a feasibility trial for pulmonary
vein ablation for focal AF. So there is no collision
there in terms of the development efforts, in terms
of technology conflicts with Cardiac Pathways. It's
very clean in that respect.
T. Prescott Maybe just to amplify that, the company went through
a huge effort for a very long time with trying to
obtain a very, very difficult label to be able to use
on the left side and got VT. Certainly, there has
been off-label use of the product. It's not something
the company's ever promoted. There
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has been a number of publications on use of Chilli
for flutter and other things.
The way we look at it is we, with RPM and Chilli, we
have created a set of tools that are useful in a
broad number of places. And as a small company, we
had to pick our spots. We certainly weren't going to
bite off another clinical and I think the opportunity
exists for Boston Scientific to understand the best
ways to deploy the collective set of technologies,
including their franchise, their product line of R&D
and clinicals, and these new tools as well as things
that we have in our pipeline that others don't know
about. So that's one of the great opportunities this
combined team's going to have to work through that we
hope can bring the right set of tools out with the
right kind of label indications to help these docs.
Moderator We go to the line of Paul Glazer with Glazer Capital
Management.
P. Glazer I don't know if you went over this previously, but
can you talk about the genesis of the transaction?
How did the two companies find each other?
L. Best The device world is very small. Boston Scientific has
a practice in the markets we serve, which are six
major franchise with leadership positions,
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of frankly following the market day in and day out
and everyone who's emerging in it. Our discussions
with Cardiac Pathways management goes back many, many
years. We've followed Cardiac Pathway's progress I
would say over the last three to five years and have
known a lot of the management at Cardiac Pathways.
So, our discussions and our dialogue have been
long-term. It got more serious in the last two or
three or four months as, frankly, we saw the
physicians, the electrophysiologists start to be very
enamored with the liquid cooled ablation technology,
especially for the advanced arrhythmias. We actually
were struck by the growing recognition that this is
going to be a leadership platform down the road. So
it complemented our base so well and our goal is in
every market we're in our goal is always the same
goal, and that is to be number one globally. The
advantage of their technology with Boston Scientific
is we have a very fast growing EP business globally,
not just in the US. Our growth in Japan, Europe and
intercontinental countries is quite impressive. So we
can accelerate this technology to market, we can
accelerate this technology and the evolution of it
with basically deeper resources in the R&D area, and
so that's what we hope to do. But the discussions
have been over a long period of time.
Moderator We now go to the line of Kim Nelson with US Bancorp
Piper Jaffray.
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K. Nelson Question for Larry. Larry, could you be a little bit
more definitive on the 2002 dilution impact? You said
$22 million may or may not be dilutive.
L. Best On a $22 million incremental base, based on the
transaction, we haven't allocated the purchase price,
that's frankly one of the two variables. One, we hope
we can do better than the $22 million. As I said,
they're closing out their fiscal year of June as of
today, with around $13 million in revenue. Putting
that platform and that portfolio into a larger force,
it's not unrealistic to add say $9 million. So we're
hoping to do better than $22 million, but on a $22
million goal, and just guestimating how the purchase
price would be allocated, it shows just about a one
cent dilution.
K. Nelson What level would it have to reach to be definitively
neutral?
L. Best Two things. We have to take a harder look at their
research and development portfolio. There probably
will be a significant R&D assessment and there may be
a write-off there which then affects obviously your
accounting going forward. We haven't got that deep
into the R&D portfolio in terms of assessing and
valuing it. So that's a question mark.
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But to make it potentially neutral, we probably would
have to do closer to $30 million.
K. Nelson Then a question for Tom. Can you tell me what the
cost is of the capital you have to use both for the
Chilli and the RPM System and combined? What does it
cost you to place that equipment in an account?
T. Prescott I'd rather not talk about our cost.
K. Nelson Well, price or hardware. You obviously don't sell it
outright.
T. Prescott We kind of capture that in terms of the net growth
margins that we wind up reporting, but the practical
matter is, we do sell some of these systems. I think
there was a question earlier by Tim Lee that I'm not
sure I ever got to, I apologize, we have around 50
RPM Systems installed worldwide and about 30 of those
are in the US. That's consistent with the forecast
and guidance we've given before.
So, where those are placed, they are placed in high
volume accounts where there's a minimum up charge on
a catheter placement. The volume and
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the up charge is more than sufficient enough to
return the capital nicely to the business. For just a
Chilli, the dynamic in the EP market for many years
has been the placement of generators. I think working
with Boston Scientific there are some opportunities
to dramatically accelerate this business without
necessarily having to accelerate the number of
generators you have to put out there to consumer
catheters, which makes it more productive for the
hospitals, it makes it more productive for the firm.
So I'm not going to answer your question as directly
as you'd probably like, Kim, but I would probably say
our costs on the hardware systems for RPM are very
consistent with other firms of our size and other
equipment in the same kind of level of complexity.
K. Nelson You said 50 RPM accounts have been installed. How
many Chilli's?
T. Prescott We've got 130-140 Chilli accounts active in the US
and a number more outside the US.
K. Nelson Great. Thanks a lot.
Moderator Our next question comes from the line of Kurt Kruger
with Banc of America.
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K. Kruger Hi, guys. Gee, Larry, you've got the cutting balloon,
you've got the new $9 million for this. If you don't
watch out, you're going to become a growth company.
L. Best Well, we're actually concerned about that.
K. Kruger I had a question about Cardiac Pathways help in your
principle market I guess for EP, which is AV and RT
and WPW, does the new company bring any technology to
bear on those indications?
T. Cohen The answer is yes, and I think it does a number of
things. Although there is a not an SVT indication for
the Chilli product, there's a VT indication, the
technology is very, very intriguing to the
physicians. It gives us an opportunity as we look
into the future and anticipate that the US ablation
market will in fact segment. It will segment with
temperature control ablation and fluid cooled
ablation. The preferred embodiment of that fluid
cooled ablation is really the Chilli catheter as
opposed to irrigated or showerhead designs.
BOSTON SCIENTIFIC CORPORATION
Host: Larry Best
June 29, 2001/12:30 p.m. CDT
Page 25
But I think what it does for us, it gives our
combined sales organization a whole new level of
excitement and reason to speak with the clinician. So
it does definitely have some halo pull through effect
on our products. It's our expectation that the
Blazer, until we can get navigation capability and
other some other things, will still be the principle
workhorse on our ablation line. We'll continue to
build the Chilli position in the marketplace as a
premium, unique patented technology.
K. Kruger Does reusability still plague the industry at all or
does the Chilli not suffer from reusability at all?
T. Cohen The reusability is still a bit of an issue in the
marketplace; however, there have been strides me from
the standpoint that the FDA has issued guidelines. As
of now, we're expecting by the middle of August to
determine whether or not any of the reprocessors have
met the requirements for an original PMA, the
ability, therefore, to reprocess therapeutic
catheters. I can't really predict what the outcome
is, but in the meantime, a lot of accounts in the
country have in fact converted from reuse to single
use. There's still accounts that are reusing as the
reprocessors that have filed PMA's are able, in this
grace period, to continue to reprocess ablation and
diagnostic catheters.
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Page 26
L. Best Tom, is it fair to say that the Chilli catheter
technology is a bit harder to reuse because of
the....?
T. Prescott Yes, what we understand, reuse has been driven by a
number of things. Number one, we think the economic
hardships in the hospitals themselves, and these are
complex products that cost them a lot of money. What
we've found is that, number one, a Chilli does not
typically get reused. It has multiple lumens in a
recirculating path that is saline and it typically
does not get reused. And secondly, given the general
effectiveness of the product, when they use it to
pull it out for a difficult case and they get that
case resolved quickly and easily, there's a whole lot
less pressure to try to yield more uses out of that
product. So I think it's the combination of both the
high effectiveness, the clinical effectiveness they
see on the front line as well as the fact that if
somebody looks at that product and says, "I don't
want to try to resterilize this" it's the combination
of those two effects.
Moderator Our next question is from Glenn Recin with Morgan
Stanley.
G. Recin Just a couple of clarifications. When you talk about
it might be dilutive in 2002, that's assuming
goodwill...expense on the income statement?
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Page 27
L. Best Yes.
G. Recin Can you comment on the size of the combined EP sales
force right now with the addition?
T. Cohen Well, we certainly have to go through an integration,
a careful and thoughtful integration process of the
two field sales organizations. If you were to simply
take the additive approach right now, in the United
States Cardiac Pathways has approximately 21 people
in their field sales organization, which is comprised
of about 15 clinical specialists and 5 sales reps and
a couple of sales managers. The EPT organization is
structured a little differently. We have about 25
sales reps, 5 sales managers and we have about 5
technical/clinical support individuals.
L. Best We do this in every integration, we plot out what the
after the acquisition combined framework for sales
and marketing should look like and then we basically
have everyone interviewed for those positions and
combine and integrate the sales and marketing forces
with the best and brightest going forward. So there's
integration in every combination, but the good news
BOSTON SCIENTIFIC CORPORATION
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Page 28
here is we think there's enough growth opportunity
that we'll probably maintain more people than usual
in terms of an integration.
T. Prescott I'm going to add on just a little bit here just to
clarify for everybody, the Boston team as well. Until
this closes, we're two separate companies and that's
especially essential out in the field operations side
at the customer interface. There's really nothing
going on out there that any transition planning is
going to be done with other folks and we're asking
our team to go get off to a great first quarter start
here, starting Monday, and I think they've got some
opportunity to join a terrific team and to make this
one-and-one is two, especially out at the customer
point.
L. Best That's right. Oh, the other thing that is important
to note here that we're excited about is the
combination of the intellectual property. Cardiac
Pathways has been in business for ten years, has
planted a lot of intellectual property in the EP
area. Likewise, EP technology has been around for
almost the same amount of time. Likewise, they have
planted a lot of EP/IP. So combined, we're well over
300 patents issued and a lot more disclosures. So
it's a very rich portfolio for catheter base
ablation.
Moderator We now go to Andrew Jay with First Union Securities.
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Page 29
A. Jay I'd like to follow up on Kurt Kruger's question a
little bit on the reprocessing. That is, first of
all, for Larry, are you seeing less reprocessing of
catheters given the regulations on device
reprocessing? And also, are you aware of anyone who's
attempting to file a PMA for reprocessing of the
Chilli catheter?
L. Best What we're feeling in the numbers in EPT in the US is
more and more accounts going to single use, which is
great news for our EP business. We think it's
absolutely the right direction based on the safety
issues.
You're probably aware that the FDA has looked closely
at this whole reprocessing issue, they've required
reprocessors to go through normal PMA route. There
has been at least one, maybe there's a number that
have gone that route. And what Tom Cohen was
referring to is a process at the FDA to now look at
these submissions and determine whether they require
clinical data or not. It's my understanding that
submissions that have been made to date do not have
any clinical data supporting their PMA and the
question is, will the FDA require them to submit
clinical data like everyone else who has achieved a
PMA. So, it's a question mark, we don't know which
way the FDA is going to go, but despite the
BOSTON SCIENTIFIC CORPORATION
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June 29, 2001/12:30 p.m. CDT
Page 30
FDA's effort, I think more and more labs are
understanding the importance of single use.
P. Laviolett Larry, just one additional comment. Clearly,
reprocessing has been a threat. It's been perhaps
more commonly practiced within EP than other markets.
We're clearly today not aware of any reprocessor that
has made a filing as it relates to Chilli. I think
this is an opportunity where the combination of the
companies will create additional prospects. Boston
Scientific has been a very strong player in trying to
drive legislative change, FDA regulatory change.
We've been an active participant in defense of all of
our businesses against the reprocessing of single use
devices and we're a strong player in both the
adv...process there as well as the Association of
Disposable Device Manufacturers. So to the extent
that we can continue to apply pressure broadly as
well as specifically within EP, we're going to and
we've seen significant growth in our businesses in
gastroenterology and electrophysiology as a result of
single use conversion. We don't know the outcome from
FDA that will be expected later this summer, but
we've influenced the business fairly positively so
far, we expect that to continue.
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June 29, 2001/12:30 p.m. CDT
Page 31
A. Jay One follow up question, if I may. Do you see
applications for this technology in other businesses,
the cooled ablation? Could you see using it elsewhere
in the body in your interventional businesses?
P. Laviolett That's a question that I will say that as of this
morning where obviously this announcement is a
surprise within Boston Scientific divisions as well
as in the marketplace, but as of this morning there
already have been conversations between divisions
about the potential application of the cooled RF
technology. So we don't have any explicit plans yet,
but I will tell you that our normal approach within
Boston Scientific is to aggressively leverage
technologies. We do have a number of other businesses
that use radio frequency energy to create
ablation-like results in solid tissue. So we will
clearly assess this, we'll orchestrate it centrally
within our corporate technology group and we will
apply it wherever it has potential.
L. Best Let me add to Paul's comments. If you take a look at
the ultrasound base navigation system and you look at
the opportunity to leverage that technology across
other divisions, other markets, I think there is
...(break in audio) ... to incorporate that
technology into other divisions and treatments.
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Page 32
P. Laviolett Let me add one comment that one party who asked a
question brought up. It's important to note that this
acquisition is driven more by the growth
opportunities and not by synergies. This is really
not an economic synergy story, it's really our view
of a great growth opportunity by combining the two
companies. Whereas some of our other combinations
from time to time are driven, at least substantively,
by economic synergies. This one is not driven by
that.
Moderator The next question is from Keay Nakae from Webb Bush
and Morgan Securities.
K. Nakae Just following along that last question, could we
expect to see a linear ablation device that utilizes
the Chilli liquid cooled technology?
L. Best The answer is, I think that is quite possible,
although our primary focus right now from a
development standpoint is really looking at
developing a solution for parenchymal atrial fib
which originates primarily out of the pulmonary veins
in the left atrium. So a lot of our designs are
related to that. But certainly, there are second and
third generation possibilities incorporating the
Chilli patented technology into those catheters. And
BOSTON SCIENTIFIC CORPORATION
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June 29, 2001/12:30 p.m. CDT
Page 33
then secondarily, we would be also looking at perhaps
redirecting our linear program to also incorporate
the fluid cooled technology. So the answer is yes and
yes.
Let's take two more questions and then we'll end the
conference call.
Moderator There are no further questions.
L. Best It sounds like there's no further questions, so we'd
like to thank everyone for their attention today and
appreciate you calling in. Good afternoon.
Moderator Ladies and gentlemen, this conference will be
available for replay after 5:00 p.m. EDT until
Friday, July 6th at midnight. You may access the
replay service at any time by dialing 1-800-475-6701
and entering the access code 593662.
That does conclude your conference for today. Thank
you for your participation. You may now disconnect.