A patent dispute regarding Boston Scientific (BSX) cardiac stents dating back to 2003 has finally come to a close with Boston Scientific to pay Johnson & Johnson (JNJ) $1.725 billion in two tranches. This major settlement is in addition to a separate patent settlement last September in which BSX must pay $716 million to JNJ. The infringement cases are not all one-way, as back in July 2005 Johnson & Johnson infringed on some of BSX’s stent technology.
The settlement will certainly not be cheap for BSX which only had about $1.38 billion in cash and equivalents on hand as of its last quarterly reporting, but the company did not
want to risk a jury trial. Boston Scientific says that the payout will not affect debt covenants, and will continue with its plan to refinance 2011 maturities later this year. The uncertainty of damages awarded at a jury trial was enough to make them want to settle this out of court even though Reuters reported on January 20th that BSX believed the court would find the patents invalid.
Obviously, this is a negative for Boston Scientific as it will reduce flexibility as we all know cash is king, especially with credit relatively harder to come by these days and debt maturing soon. The stock is trading down only about 3.5% because this settlement is not a big surprise to the market. We are maintaining our Fairly Valued rating on BSX, even as the price has come down about 23% in the last six months.
We think investors are starting to worry about the debt burden for BSX and that its not being justified through better sales and earnings. They may be able to refinance at more favorable rates in the coming year, but their fundamentals need to improve in order for us to become excited about their future. This does take the risk of an unfavorable verdict from the jury off the table, yet this has come at quite a price.
