Fitch Ratings has affirmed Boston Scientific Corporation's (BSX) long-term and short-term ratings at 'BBB+' and 'F1', respectively, including the instrument ratings issued by BSX or issued by American Medical Systems Europe B.V. and guaranteed by BSX and maintained the Rating Outlook at Stable upon the announcement that it intends to acquire Axonics, Inc. for $3.4 billion net of cash.

The transaction, when coupled with the previously announced Relievant Medystems transaction, results in M&A expenditures being higher than Fitch forecast and potentially leading to leverage temporarily sustaining above Fitch's negative rating sensitivity.

The affirmation and Stable Outlook reflect Fitch's view that the transactions are qualitatively consistent with Fitch's expectations for the size and type of M&A that BSX seeks to engage in as well as the timeline and means for restoration of key credit metrics.

Key Rating Drivers

Strong Revenue Growth to Continue: Fitch forecasts top-line growth to be in the high-single digits over the rating horizon. BSX has delivered a reported revenue growth of 11.4% and operational growth of 12.6% during the first nine months of 2023 compared with the prior year period. The solid top-line performance is supported by the diversity of BSX's product portfolio, strong execution, and growth in the underlying markets. BSX increased its long-range plan (LRP, 2024-2026) revenue growth outlook to a CAGR of 8%-10% from 6%-8% in prior periods at its Investor Day in September 2023, supported by further global expansion and a continued shift into higher growth categories through differentiated launches.

Focus on High-Growth Segments: BSX continues to focus on its high-growth markets, including electrophysiology, peripheral interventions, and structural heart. The company's high-growth businesses currently constitute roughly 35% of revenue and contribute high-single to double-digit growth. Approximately 45% of revenue is attributable to moderate-growth businesses, including endoscopy and core urology, which offer mid-single-digit growth profiles. The remaining portion of the business (pacers, defibrillators, drug-eluting stents) contributes low growth. BSX expects 45% of its revenue to be generated from high-growth markets, 40% from moderate-growth markets, and 15% from low-growth markets by 2026, supporting an overall weighted average market growth rate (WAMGR) of 7%-8%.

Fitch anticipates that the continued adoption of existing products such as the Watchman franchise, and the U.S. commercial launches of differentiated products including Farapulse, Agent drug coated balloon, and Acurate aortic valve system in late 2024, will underpin BSX's high-single digit growth over the rating horizon. An already-strong internal R&D pipeline will likely be further supported by a preference for tuck-in to midsized acquisitions going forward.

Disciplined Approach to Capital Deployment: Fitch expects EBITDA leverage will be 2.4x at YE 2023 and return to around 2.5x in 2025 pro forma for the acquisition and potentially sooner depending on how much long-term debt is used to finance the acquisition. Fitch also recognizes that BSX has a publicly stated a target gross leverage of 2.25x-2.50x and has demonstrated its commitment to managing a conservative financial policy in the issuance of preferred and common stock in mid-2020 to repay debt following the BTG plc acquisition. The company has never issued a common stock dividend. However, Fitch expects share repurchases will become a more meaningful use of FCF than it has been historically based on comments made by Boston Scientific at its investor day in September 2023.

Fitch expects tuck-in M&As will continue to be the top capital allocation priority for BSX and investments in pre- or early commercial stage assets could introduce uncertainties around timing of meaningful revenue contribution and cash flow volatilities. The company has completed roughly 40 acquisitions over the past 10 years totaling over $17 billion in size across all business units, with BTG plc being the largest transaction in the size of $4.2 billion and the rest predominantly under $1 billion. A majority of BSX's acquired assets were innovative or unique technologies in their early commercialization stages that are synergistic with BSX's product portfolio, and upon integration with BSX's existing operations, drove growth for the company.

The Axonics acquisition is generally consistent with Fitch's expectations, though it will be one of the larger transactions in recent history. Axonics' core sacral neuromodulation products are relatively early in their commercialization, will expand and diversify Boston Scientific's urology portfolio to compete more directly with manufacturers such as Medtronic plc, and are delivering significant yoy revenue growth and margin expansion opportunities.

FCF Generation in Focus: Fitch anticipates FCF to improve to $1.6 billion in 2023 driven by moderated yet still elevated working capital investments, and to above $2 billion beginning in 2024, supported by operating strength and further normalization of working capital. Fitch believes the company's FCF will allow it flexibility to pursue targeted acquisitions without incurring meaningful debt. BSX's FCF has historically lagged peers due largely to its significant litigation and acquisition related payments. FCF for 2022 was low at $879 million due largely to a significant working capital requirement as a result of supply chain challenges and inflation. BSX expects FCF to improve over the LRP driven by revenue growth, margin expansion, and the diminishment of litigation-related expenses, and introduced an FCF conversion target of 70% by 2026 at its investor day.

Limited Near-Term Impact from GLP-1 Agonists: Fitch does not expect GLP-1 Agonists to adversely affect demand for BSX's products over the rating horizon though long-term impact is possible if the drug class were to be proven effective in reducing cardiovascular and/or vascular risks leading to less procedure volumes in the disease categories.

Derivation Summary

Boston Scientific Corp. (BBB+/Stable) is a large diversified medical device firm focusing on interventional cardiology, peripheral interventions, cardiac rhythm management, electrophysiology, endoscopy, urology, pelvic health and neuromodulation. The company provides physicians with innovative and less-invasive medical devices, which it develops through internal R&D, acquisitions or collaborations.

In terms of revenue scale, BSX is similar to Baxter International (BBB-/Stable), larger than Zimmer Biomet Holdings, Inc. (BBB/Stable), and smaller than Becton, Dickinson and Company (BBB/Stable), although the companies' product portfolios differ significantly. Baxter's acquisition of Hill-Rom significantly stressed its historically conservative capital structure, and along with the underperformance caused by macroeconomic headwinds and its ongoing divestiture, pushed the company's Issuer Default Rating (IDR) to 'BBB-'/Stable from 'A-'/Stable prior to the acquisition. Zimmer Biomet has a similar financial structure profile to BSX, and Fitch expects the company to maintain EBITDA leverage between 2.5x-3.0x. While smaller than some of its competitors such as Becton, Dickinson and Company, BSX has a relatively broad and innovative medical device portfolio that enables the company to remain very competitive both domestically and internationally.

The 'F1' Short-Term IDR is supported by the company's strong financial flexibility, financial structure and operating environment. BSX's financial structure subfactor of 'bbb+', financial flexibility subfactor of 'a' with very comfortable liquidity, and good operating environment of 'aa' given the locales in which it operates, all support the 'F1' short-term rating. The prior upgrade from 'F2' was based on an increase to the three-notch midpoint of the financial flexibility subfactor.

Key Assumptions

Revenue growth of 11% in 2023 and high single-digit growth during 2024-2026;

EBITDA margin to expand 150bps between 2023-2026 driven by cost reduction and favorable product mix shift;

Fitch adjusted EBITDA margin is expected to be 28.3% in 2023, reflecting a 210bps compression from the 2022 level due predominantly to Fitch's decision to no longer add back acquisition-related charges starting in 2023, considering their recurring nature;

FCF improves annually largely due to top-line growth, margin expansion, and normalization of working capital;

A total of roughly $10 billion in acquisitions (2023-2026) and $1.8 billion in share repurchases over the rating horizon.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

An operational profile that could lead to significant and durable increases in FCF, resulting in (cash from operations-capex)/debt at or above 20%;

Cash deployment policy and resulting capital structure that would durably sustain EBITDA leverage below 2.25x.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

Material and lasting deterioration in operations and FCF, resulting in (cash from operations-capex)/debt sustained below 15%;

Persistent increase in EBITDA leverage at or above 2.75x;

Acquisitions without the prospect of timely debt/leverage reduction.

Liquidity and Debt Structure

Solid Liquidity: BSX has solid liquidity with $952 million of cash on hand at Sept. 30, 2023. BSX also maintains a $2.75 billion revolving credit facility due May 2027 and a $2.75 billion CP program backed by the revolver, both of which were fully available at Sept. 30, 2023. Fitch expects liquidity to be consistently supported by solid cash generation throughout the forecast period. Fitch assumes the acquisitions will be funded via incremental debt issuances.

Debt Maturities Manageable: BSX's debt maturities are well laddered with $500 million due within 12 months. Fitch expects the company will refinance bond maturities as they come due, outside of larger leveraging transactions.

Issuer Profile

Boston Scientific Corp. (BSX) is a global developer, manufacturer and marketer of medical devices that focuses on a broad range of interventional treatment for cardiovascular disease, neurological disorders, urological illnesses, cancer and surgery.

Summary of Financial Adjustments

Debt adjusted for unamortized debt issuance discounts and A/R Factoring. EBITDA adjustments made for restructuring expenses, intangible asset impairments, litigation charges, stock-based compensation, and historical acquisition and divestiture expenses.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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