Boston Scientific CEO Takes a Seat on the Bench

The struggling company decides to wait for leadership

Boston Scientific (NYSE:BSX) got its man, sort of.

Last week, the Natick, Mass.-based maker of stents, defibrillators and other medical devices announced it had wooed away Johnson & Johnson (NYSE:JNJ) executive Michael Mahoney to be its CEO. The huge caveat is that Mahoney won’t be able to assume that role until more than a year from now due to a non-compete agreement.

To use a  pro football analogy, isn’t this sort of like the Indianapolis Colts acquiring quarterback Carson Palmer from the Cincinnati Bengals but agreeing he can only play every third Sunday? After all, like the 0-2 Colts, Boston Scientific appears to need Mahoney’s leadership now, given the company’s myriad challenges, including declining sales, layoffs, product recalls, unit sell-offs, government probes and large patent settlements.

Evidently, the Boston Scientific board thinks half a loaf is better than none. So until the 46-year-old Mahoney ascends to the CEO role in November 2012, he’ll serve as president, starting Oct. 17.  However, he will be prohibited from providing input to any Boston Scientific business that J&J is in today, including stents, as well as catheters for diagnosing and treating abnormal heart rhythms. That amounts to quite a bit that will be out of bounds for Mahoney, considering these businesses accounted for nearly 60% of the company’s sales last year.

“This whole scenario is more than a tad unusual,” Larry Drapkin of the law firm Mitchell, Silberberg & Knupp in Los Angeles, told the Associated Press. “Everybody wants to choose a CEO and have him up and running [immediately] rather than sit on the sideline,” he added.

J.P. Morgan Analyst Michael Weinstein doesn’t like the arrangement either, calling the transition period “messy,” according to AP. He’s not pleased that the Boston Scientific board will be guiding the company’s strategic direction until Mahoney takes over.

“You’re separating the people running the company from the people who are calling the shots, and this company has a big strategic issue — where is its growth going to come from? And that disconnect doesn’t make” solving that issue any easier,” he said.

Some industry observers think there’s more than meets the eye behind the unusual agreement. Larry Biegelsen, an analyst with Wells Fargo Securities in New York, said in a note to investors that this may be a prelude to J&J making a run at acquiring Boston Scientific, according to Bloomberg.  That speculation was fueled earlier this year when J&J said would stop selling drug-coated stents used to prop open clogged arteries, a market led by Boston Scientific.

Mahoney was certainly considered a rising star at J&J. He was made worldwide chairman of J&J’s medical device and diagnostics group earlier this year.  Previously, he led the company’s DePuy unit, which manufactures orthopedic and neurological devices.

No doubt, Boston Scientific needs some new blood. In the past two years, the company’s shares have declined more than 40% to $6 and change. That’s not much of a surprise given the firm has reported a loss every year since 2006.

Shareholders can only hope that when Mahoney finally takes center stage he brings along a few miracles.

At the time of publication, Barry Cohen owned shares of Johnson & Johnson.


Article printed from InvestorPlace Media, https://investorplace.com/2011/09/boston-scientific-ceo-takes-a-seat-on-the-bench/.

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