New Boston Sci CEO Brings Strong Legacy, But Also Questions
June 25 2009 - 4:47PM
Dow Jones News
Incoming Boston Scientific Corp. (BSX) Chief Executive Ray
Elliott brings a track record that includes strong growth and
profitability from his tenure at Zimmer Holdings Inc. (ZMH), but
also some questions about whether Zimmer's successes contributed to
longer-term problems.
Elliott left the orthopedics heavyweight about two years ago
after a 10-year run as its leader, a time in which Zimmer
quadrupled its annual sales, successfully spun off from
Bristol-Myers Squibb Co. (BMY) and built a strong reputation in the
$11 billion market for replacement hips and knees. He left on a
good note, just as Zimmer's shares crested at an all-time high.
As a well-known personality in the medical-devices field,
Elliott's arrival at Boston Scientific - where he'll replace
retiring CEO Jim Tobin - has been welcomed. The company's stock
surged after Thursday's announcement, recently trading up 8.5% to
$10.32.
But Elliott "does not come without controversy," Wachovia
analyst Larry Biegelsen said.
The new CEO "has a reputation as a strong executor who wrings
costs out of the system," Biegelsen said. But following
post-Elliott blows to Zimmer's growth, margins and share price,
"investors place some of the blame on Elliott because they believe
he did not invest in the business at an appropriate level," the
analyst added.
Elliott said he doesn't agree with that criticism because the
company enjoyed a decade-long successful run while greatly
expanding research and development efforts. It wasn't merely a
short-term gain.
"I find that one really hard to swallow," Elliott said in an
interview with Dow Jones Newswires.
To be sure, his record of building profitable sales growth will
be an asset at growth-challenged Boston Scientific, which has
stumbled in its own right as it digested the $28.4 billion purchase
of Guidant Corp. three years ago. Questions about what upcoming
moves will mean a decade from now may not concern investors
much.
"There was such this hyper-focus on profitability" during
Elliott's tenure at Zimmer, said Raj Denhoy, an analyst with Thomas
Weisel. "In the context of Boston Scientific, you could have a lot
of really, really good years doing that."
Shares of Zimmer peaked above $94 in late April 2007, days
before Elliott's replacement was named. But the Warsaw, Ind.,
company currently trades at less than half that level because of a
mix of problems.
Some are beyond its reach, such as a squeeze on orthopedic
growth brought on by the recession. But the company also has
endured some product troubles and has ceded market share to rivals
in recent quarters as it implements a sweeping overhaul to its
systems for interacting with doctors.
Those changes are linked to a long government investigation into
whether orthopedics companies, including Zimmer, were using
payments to surgeons to curry favor. The probe led to an
industry-wide deal with the Department of Justice in late 2007 that
sparked big industry changes.
Zimmer, where new management undertook particularly disruptive
changes that may have caused some surgeons to shift loyalties, paid
by far the steepest tab while resolving the DOJ investigation.
There is no way to know for sure whether actions during
Elliott's Zimmer tenure planted seeds for later problems, noted
Denhoy, who called Elliott "a lion in the industry." But questions
have emerged about whether the tight focus on profitability that
Zimmer investors initially cheered came with unfavorable
baggage.
"In retrospect there's this belief that maybe they should have
put a little more back" into the business, Denhoy said. The needed
investments range from sales and marketing to information
technology and smaller businesses, he said.
Elliott on Thursday stressed an interest in investing in the
parts of Boston Scientific's business that aren't as well-known,
such as urology and women's health. The company's big business for
profitable heart devices such as stents and defibrillators are most
closely tracked by analysts and investors.
Long-time medical devices analyst Rick Wise, now with Leerink
Swann, noted that Elliott's "legacy seemed mixed" given the
circumstances at Zimmer. But Wise also said "his overall
contributions to the company are hard to question."
-By Jon Kamp, Dow Jones Newswires; 617-654-6728;
jon.kamp@dowjones.com