Fitch Ratings has affirmed
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
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
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
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
The
FCF Generation in Focus: Fitch anticipates FCF to improve to
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
In terms of revenue scale, BSX is similar to
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
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
Debt Maturities Manageable: BSX's debt maturities are well laddered with
Issuer Profile
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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