Krause Fund Research Spring 2020

April 15, 2020 Boston Scientific Corporation (NYSE: BSX) NO ACTION Health care – Medical Devices Stock Rating:

Analysts

Andrew Chelmowski Benjamin Gardner [email protected] [email protected] Current Price: $35.92

Target Price Range: $40 -$53 Investment Thesis DCF & EP IntrinsicStock Values Value: $48 We recommend a neutral, no action rating for Boston Scientific Corporation.

BSX features promising long-term growth goals and is a leading player in the advancements of Interventional Cardiology. However, with a highly Key Statistics competitive landscape and global supply chain disruption due to COVID-19, Market Cap $49.2 B we recommend no action at this time. Shares Outstanding 1.39 B Drivers of Thesis 52 Week High-Low $46.6 - $24.10 § Long-Term Growth Goals: In 2019, BSX gave guidance on their long- term growth plans, centered around category leadership and product Beta inancial Ratios 1.08

diversification into faster12-growth-Month Performance markets. R & D spending was P/E Ratio 20E 23.5 approximately $1 Billion dollars, showing their dedication to their long- term growth strategy. Industry Metrics R&D (% of Sales) 11.51% § Foundation of Successful products: Successful products have positioned BSX well to continue expanding. The WATCHMAN, an ROE 20E 13.96% appendage closure device, continues to serve the Cardiovascular ROA 20E 11.88% segment extremely well, while the ACURATERelative Financial Performance Valve, LOTUS Edge, and Millipede all continue to serve the Rhythm Neuro and MedSurg Financial Ratios

segments with positive growth rates. Current Ratio 1.89 Risks to Thesis Debt-to-Equity 1.12

§ Competitive Landscape: BSX operates in several markets including Company Description Cardiovascular, CRM, Endoscopy and Neuromodulation where its Boston Scientific Corporation (NYSE: BSX), face-to-face with larger, well-capitalized companies like Johnson & headquartered in Natick, Massachusetts Johnson, Abbot, and Medtronic. Staying competitive and unique is manufacturers and develops minimally intrusive the only way BSX combats these colossal companies. medical devices across the globe. BSX generates revenue through three segments: § Supply Chain Disruption: BSX operates in over 70 different countries Cardiovascular, Rhythm Management, and and relies on fluid transportation and manufacturing to operate at MedSurg. These segments transpire into 7 maximum capacity. With COVID-19 shutting down centers, revenue businesses. Endoscopy, Urology and Pelvic will be impacted greatly. Health, Cardiac Rhythm Management, Electrophysiology, Neuromodulation, Earnings Estimates Interventional Cardiology, and Peripheral Interventions.

Relative Financial Performance

12-Month Performance

BSX: S&P:500: Executive Summary COVID-19 effect on Capital Markets We are issuing a neutral, no action rating for Boston Scientific Corporation (NYSE:BSX) for the Krause COVID-19 sent the stock market into a spiraling Fund Portfolio. With projected revenue growth of downturn as the S&P500 was down 33% over a 4.25% in 2020 and 7.10% in 2021, we believe BSX is 1-month period during the midst of the panic. Boston positioned to match competitors within the medical Scientific saw an even more drastic downfall of almost devices market. With BSX being a leading player in 40% over that same time period. Market consensus is Interventional Cardiology, we believe their that Q1 and Q2 earnings will be negative following the Cardiovascular segment of their business will continue pandemic however analysts, including ourselves, are to outperform not only all other segments at BSX, but weary if current stock prices accurately represent these the greater market as well. We are weary of assumptions. With government-funded bailouts in the competitors like Medtronic in the CRM business, as talks and stimulus checks to the American people being they create almost double the revenue off pacemakers delivered, short-term aid by the government will provide as BSX does.1 In other business segments like temporary relief, but is clearly not a long-term fix. Urology and Pelvic health, Johnson and Johnson (JNJ) has a clear advantage in terms of capital expenditure and market capture.2

Statement on COVID-19 Unprecedented times cause uncertainty and worry in the markets. While it is extremely difficult to encapsulate the total effect of COVID-19 on BSX, the health care sector, and even the markets as a whole- we remain confident that the integrity of our analysis remains intact and the guidance we provide in this report fully represents our beliefs at this time.

Note: As of April 2, 2020, Boston Scientific has withdrawn its Q1 and 2020 guidance. Source: Tradingview

COVID-19 effect on GDP BSX Response: COVID-19 Recent models from McKinsey and Oxford suggest global GDP to decline at 2.0% - 2.5%, with the US GDP In light of the pandemic and uncertainty, we are declining at 3.3%. The healthcare sector makes for impressed with Boston Scientific’s response to the about 18% of GDP in the United States, making the matter. As of April 15, 2020, the FDA has authorized healthcare sector and specifically MedTech one of the emergency use of a new low-cost ventilator developed hardest hit sectors by the pandemic. by the University of Minnesota and produced by BSX.3 The “Coventor”, which is the size of a small desktop, will provide lifesaving compressed oxygen to patients that COVID-19 effect on Unemployment otherwise would not have survived. The Coventor, which was developed in just days, will be sold at cost of As of April 3, unemployment rose to 4.4% as $1,000. BSX has also begun development on PPE and employment fell sharply by 701,000 jobs, though we personal respirators for emergency personal amidst a predict that number is well into the millions at this point. shortage in hospitals and emergency response centers. The health care sector felt these impacts, as a reported BSX has also donated over $800,000 in supplies to 43,000 jobs were lost across all sectors. MedTech hospitals in the Wuhan region, according to their press companies that rely on worldwide manufacturing, release.4 While selling products at cost is clearly not a similar to BSX, felt the unemployment burden the most sustainable business plan, we commend BSX for their as all the puzzle pieces must align to create their ethics in the matter and putting people over profits products. If certain parts cannot be fulfilled to complete during these grim times. an instrument, it renders the tool useless.

Important disclosures appear on the last page of this report. 2

Macroeconomic Outlook chance that the Fed hikes rates from 0-.25% in the next year. This is an astonishing statistic that we have not seen U.S. Real GDP before. This is a very strong indication that the interest rate environment will remain low and healthcare GDP represents the total value of the country’s production companies can continue to stabilize or expand their consisting of the purchases of domestically produced business operations. goods/services by individuals, businesses, foreigners, and government entities. “The federal government spent nearly

$1.1 trillion on health care in fiscal year 2018. Of that, U.S. 10 Year Treasury 5Y Historical Medicare claimed roughly $583 billion, Medicaid and the Children’s Health Insurance Program (CHIP) about $399 billion, and veterans’ medical care about $70 billion.”5

18% of GDP spending is attributed to healthcare. To compare, the current global health expenditure is 9.9% of GDP. While 18% is a large percentage of GDP, we believe this number to be of a “steady state” factor. With the risk of Source: CNBC 9 a universal healthcare system dwindling away, the healthcare industry will continue to a large component of the

US GDP.6 Demographics

Demographics are one of the most prevalent drivers of GDP growth has been steady since the end of the growth in the healthcare sector with three major recession in 2011, ranging from 1.6-2.9% growth annually. components shaping its outlook: “Baby Boomers”, life expectancy, and U.S. fertility rates.

The “Baby Boomer” age group will enter their elderly years (65+) starting in the year 2030 and currently represent the largest generation in the country at roughly 21%. Elderly people are more susceptible to adverse health conditions such as chronic diseases and injuries which will fuel demand for additional healthcare products and services.10 The increasing number and lifespan of elderly Americans will drive up the demand for healthcare services and products including healthcare insurance (managed healthcare industry), hospitals (healthcare provider industry), radiation services for cancer treatment (healthcare provider industry), and prescription drugs (pharmaceutical industry).

Interest Rates With life expectancy trending upwards, the older aged U.S. population will be alive for longer and bear continued When interest rates are lower, firms will be able to gain necessity for medical services. The average U.S. life cheaper debt financing to fund their capital expenditures. expectancy has returned to 78.93 years in 2020 for the first Medical Device and biotechnology companies, especially, time since declining from a peak of 78.9 years in 2014. The focus on pursuing inorganic growth through M&A. Low leading contributors to the increase in life expectancy are interest rate environments make it easier to fund declining mortality from cancer, then declining fatalities from 11 acquisitions (cost of capital is lower).7 drug overdoses.

The U.S. 10-year Treasury rate has been in a relative The U.S. fertility rate has been on a steady decline in the downturn since hitting its five-year high in late 2018. As of last decade, reinforcing the age distribution skew to older April 15, the 10-year Treasury rate is at 0.60%. According aged citizens and putting more pressure on social security. to CME Group8 and their “FedWatch Tool”, there is a 0.0%

Important disclosures appear on the last page of this report. 3

U.S. fertility rates have been hitting all-time lows since early Unemployment 2008. In 2018, the final fertility rate was cited at “1.73, a decline from 1.766 in 2017 and 1.821 in 2016”12 Full-time employees often receive health benefits as part of their job compensation, with higher unemployment rates, Life Expectancy from Birth (Years) healthcare insurance companies see negative impacts to their sales. The unemployment rate continues to see a downward trend with latest unemployment figures around 4.4% as of March 2020. This is a decrease from December 2009, where unemployment rates hovered at 9.9%.16

Source: MacroTrends13

Consumer Price Index (CPI)

The Consumer Price Index is a measure of inflation and the rate at which it grows compared to the purchasing power of an urban consumer. Based on current and historical data, the medical care index has grown at a higher rate than other sectors. Meaning people tend to spend more on medical care now than they have in the past, relative to other sectors.14

17 The medical care index rose 4.6 percent in 2019, well above its 2.0-percent rise in 2018 and the largest December-to- December advance since 2007. It should be noted that the With more employees participating in the workforce, there CPI for the “all items” index rose 2.3%, well below the is greater access to healthcare through company benefit 14 medical care index of 4.6% in 2019. This data is all plans. Health insurance companies receive on average, relevant to prove the healthcare industry is a strategical $5,000 in premiums a year per individual. Meaning that place to invest due to the sheer amount of money that is every time the workforce increases by 200 people, health processed. insurance companies are recovering an extra $1 million in premiums. Based on current trends, we predict the gap between medical costs and all other items to increase by a margin of As unemployment continues to rise as millions of Americans 4.3% year/year. By December 2023, we predict the CPI of are laid off, we will soon see a decrease for the demand of Medical care to reach 560.87. health care services as people start to defer these costs to save money. The faster people get back to work, the faster the health care sector can continue making money.

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Important disclosures appear on the last page of this report. 4

Industry Analysis given to many devices meaning that if a different company creates the same device as another company Industry Description but is more efficient or has a better success rate.

18 Porter’s Five Forces Peer Comparisons Competition - High

The medical device and supply industry has rivalry Some of Boston Scientifics competitors and peers among competitors as companies try to make the most include Medtronic, Abbott Laboratories, Stryker, and effective version of products to capture the highest Baxter International: amount of market share. Boston Scientific is a pretty competitive company in the medical device industry as Medtronic is a medical device company that sells they have won various awards for their products. Also, medical devices in 150 countries and brings in over $30 companies in the medical device industry have put a billion in revenue annually. heavy emphasis on research and development along with marketing fees to get their products known and Abbott Laboratories is sized similarly to Medtronic and reliable in the market. also brings in over $30 billion in annual revenue. Abbott’s main revenue segments are medical devices, Potential of new entrants - Low nutritionals, diagnostics, and established pharmaceuticals.19 The medical device industry has extreme barriers for entry compared to other industries in the U.S. economy. Stryker is a similarly sized medical device firm as The main barrier to entrance is the significant research Boston Scientific. Stryker’s products are primarily and development expenditures, given the large associated as surgical equipment including products amounts of companies that have products that are used in joint replacement and trauma surgeries.20 already accepted as safe and effective. Another barrier in the industry is getting FDA approval for their Baxter International is very comparable to Boston products, and having an established marketing network Scientific both companies have brought in just over $10 to distribute products to key buyers. billion in revenue in the past year. Their products are used in hospitals, nursing homes, doctor’s offices and Power of suppliers – Low to Moderate even by patients at home.21

Boston Scientific has hundreds of global suppliers. This Sales can give them leverage in negotiations as they have more than one possible supplier. One reason the power In terms of size of these medical device companies and of suppliers may be moderate is due to the strict the amount of revenue they generate relative to each regulatory requirements that companies have to go other, Medtronic and Abbott Laboratories are more well through in order to be recognized as a reliable supplier. established than the other competitors we are

Power of buyers - Medium comparing with Boston Scientific. Boston Scientific, Baxter International, and Stryker all generate around The majority of buyers in the medical device industry the same amount of revenue each year which makes are health care providers and not individuals. Health our comparisons with other key metrics more accurate care providers purchase multiple different kinds of than comparing with the more established companies. medical devices and tools as they treat hundreds of conditions. Some products have no substitutes as they The reason we include these larger companies is are new products for conditions that may have just because some of their departments are just as big as surfaced. BSX as a whole. While these companies like Medtronic, JNJ, and Abbott are bigger, BSX can still compete with Threat of substitute products – Medium their individual departments within the organization.

The threat of substitute products is not very high in the medical device industry because usually after upgrading to a new device or tool, it is unlikely to go back to more traditional approaches. The threat can be moderate given that improvements and upgrades are Important disclosures appear on the last page of this report. 5

Source: SEC Edgar, 2019.

Catalysts for Growth

Rise in Number of Device Approvals

Premarket approvals (PMAs) and humanitarian device Source: Factset exceptions (HDEs) have been increasing since 2013 R&D as a Percentage of Sales fairly constantly, although there was a decrease in the amount of PMAs and HDEs in 2018. In 2018; however, R&D is often the most significant expense for medical there was an increase in de novo clearances which are device companies as the drugs produced from the given for medical devices that are considered safer, process are the key revenue drivers for the firms. This which is a positive for the industry as they have been is an important metric to look at when comparing firms increasing steadily since 2015. Obviously, a higher to each other to see which companies are innovating level of device approvals gives a positive outlook for the and continuing to improve their devices and tools. medical device industry, it also helps to make sure these devices are deemed safe. While there has been Boston Scientific is much smaller compared to the a dip in approvals, we have seen an increase of devices majority of its competitors in terms of both market value deemed safe since 2017. and sales. However, it is spending significantly more of its revenues on R&D expenditures. The average R&D expenses for the larger, more established companies is around 5-7.5% of total revenues. Boston Scientific is above 10%, this means that Boston Scientific is really focused on improving their products, which can be seen looking at the numerous updated devices they release.

Source: SEC Edgar, 2019.

Increased R&D spending Return on Equity (ROE) R&D spending has been on a steady incline since 2014 ROE measures a company’s ability to generate even with R&D as a percentage of sales has been earnings from capital provided by equity holders. decreasing since 2015. This shows that companies are Boston Scientific has the highest ROE in comparison to generating more revenue relative to the amount of R&D its competitors, and around the same average debt to they are spending. This gives a positive outlook for the equity as its competitors. This means that Boston future of the medical device industry. Scientific is able to generate a great return to the value of the shareholders without taking on excess amounts of debt.

Important disclosures appear on the last page of this report. 6

Products and Segments

Boston Scientific operates in 3 business segments, comprised of 7 different businesses in the medical device field. Boston Scientific has the highest market share of cardiac rhythm management and the cardiovascular segment with 9.62% and 8.63% of market share respectively in those segments21. After analyzing the revenue and growth rates for these segments, it is clear that Boston Scientific is growing the segments with less revenue share over the segments with higher revenue share. We see this as a good step for BSX as it shows that they want to be a leader in not just one or two segments but lead more segments in the market in the future.

Key Investment Positives/Negatives Given the large acquisitions BSX has made recently and their foundation of safe and reliable products that have won awards, the company is set to continue to grow in the next few years.

Due to the competition with larger companies including the likes of Johnson & Johnson, Medtronic, and Abbott, Boston Scientific will need to stay competitive and continue to be unique from their competition in order to break the barrier from being a medium sized medical device company to a large sized firm in the industry.

Also given the current circumstances of COVID-19, we Source: Statista expect Boston Scientific to have some supply chain issues as they operate in over 70 different countries. MedSurg Having to shut down centers in multiple countries of operations we expect BSX’s revenue to be greatly MedSurg is comprised of the Endoscopy and Urology & impacted for the foreseeable future. Pelvic Health businesses and accounts for 31% of total revenues at BSX. One of their highest in demand products from the segment is the SpyGlass DS system, Company Analysis which is a microscopic camera system designed for

pancreatic bile ducts. We predict Endoscopy and UPH Overview and Business Description businesses to break double digit growth rates by 2022 Boston Scientific is a manufacturer of medical devices. before setting into 7.00% -7.50% growth rates by steady Boston Scientific participates in all stages of production state 2026. and commercialization of products that can be used to treat thousands of different conditions. Boston Scientific Rhythm and Neuro has averaged 8.5% annual revenue growth for the past three years. We believe that Boston Scientific will Rhythm and Neuro is comprised of the Cardiac Rhythm continue to grow at a steady rate of 6.00% after 2026 Management, Electrophysiology, and Neuromodulation and will release tens to hundreds of new products or businesses and accounts for 29% of total revenues at improvements on old products each year, making them BSX. The CRM business revolves around producing a large component of the Medical device and tool cardiac defibrillators and pacemakers, which has seen industry. a slow decline in growth due to high amounts of competition from competitors like Medtronic and

Important disclosures appear on the last page of this report. 7

Johnson & Johnson. We predict the Rhythm and Neuro We then expect revenue to slowly bounce back to 8% segment to be propelled by Neuromodulation and growth in 2021, followed by 10.57% growth in 2022. Electrophysiology businesses within the next 2-4 years as they reach 10.39% and 10.00% growth rates Continuing Value Growth respectively in 2023, before settling into steady state growth rates of about 7.25% in 2026. We also predict Due to market saturation, we expect BSX’s revenues to CRM to hold flat in growth rates before settling into a stabilize at 6% growth starting in 2025. This is right small decline of -0.1% growth in 2026. around the stable growth rate that Bloomberg had. Bloomberg’s forecast goes out to 2024, and their Cardiovascular revenues were stabilizing at a growth rate of 7.26%.

Cardiovascular is comprised of Interventional R&D as a % of Sales Cardiology and Peripheral Interventions businesses and makes up 40% of total revenues at BSX. BSX is a Research and development is a necessary expense in leading player in the advancements of Interventional the medical device and tool industry as companies are Cardiology. The Watchman, one of Boston Scientifics constantly working on improving and creating new top selling products, is a device that is permanently devices and tools. We decided to take a moving implanted in the left atrial appendage. The left atrial average over the past 10 years of their R&D as a appendage is known to be the source of over 90% of percentage of sales and calculated this out to be stroke causing blood clots.22 In 2018, the Watchman 11.51%. This is what we expected as their R&D as a device was given the Prix Galien USA Award for the percentage of sales has been extremely consistent in best medical technology. We predict Cardiovascular to the past 10 years ranging from 10-12%. Eventually, this reach high-single digit to low-double digit growth rates will slowly decrease as we believe sales will be by 2022 before gradually settling in at about 6.50% increasing at a faster rate compared to R&D growth, steady state growth come 2026. given that most established companies have a lower R&D compared to sales, around 5-8%. Valuation Analysis Cost of Goods Sold Methods of Valuation Since 2013, BSX’s cost of goods sold has ranged from We arrived at our target stock price using three 25-27% of revenue and constantly been at 26% for the valuation methodologies: discounted cash flow, past four years. We do not expect much of a change to economic profit, and relative valuation. By incorporating cost of goods sold and are starting with cost of goods our assumptions of the economy, healthcare industry, sold as 26.86% of revenue and slowly decreasing as and firm-specific financials into these models, we revenue stables out, which is a trend we have seen in calculated Boston Scientific’s intrinsic equity value. the past ten years with BSX. Given that Boston Scientific does not pay dividends, we determined that the dividend discount model estimate SG&A was not completely representative of the company. As a manufacturer, BSX has always had a fairly high Revenue Growth SG&A expense compared to revenue, it has steadily been around 36-37% over the past four years. We Boston Scientific’s revenues are decomposed based on predict a higher expense of around 39.22% of revenue their 7 product segments. Interventional cardiology, this year given the COVID-19 circumstances that will cardiac rhythm management, and endoscopy are the likely be causing high administrative costs with centers three leading segments in terms of net sales. We shutting down and issues with shipping and producing predicted Boston Scientific’s revenues to fall from the products. Analysts’ predictions of around 9% down to 7% on the year. Due to Boston Scientific having a large amount of Weighted Average Cost of Capital (WACC) revenue come from China, the company has stated that they expect revenue decreases for at least the first two We calculated BSX’s Weighted Average Cost of quarters of the year. Capital of 6.47% that we used to discount the unlevered free cash flows in the DCF and EP models.

Important disclosures appear on the last page of this report. 8

We found 6.47% by multiplying BSX’s cost of debt with adjustment to get the intrinsic value today instead of at its respective weight and their cost of equity with its last fiscal year end which is what was calculated. respective weight. The only difference between the DCF and EP model is -Cost of Equity that in the EP model we used the forecasted economic profits to calculate out the continuing value. We then To calculate BSX’s cost of equity, we used the CAPM discounted the EP’s and the continuing value at the model. We took the current 10-year treasury bond of WACC to get the present value of operations. We then .60% as the risk-free rate and took the average of the had to add back the beginning invested capital for the 2, 3, 4, and 5-year weekly beta’s of 1.08. Then we present year because that is not factored into the used Damodaran’s equity risk premium of 6.16% forecasted economic profits. After finding the present which is the excess return of investing in the stock value of operations we followed the same steps in the market compared to the risk-free rate. Using these DCF model to get the same intrinsic value of $47.40. inputs, we calculated a cost of equity of 7.24%. Our dividend discount model resulted in an intrinsic -Cost of Debt value of $22.67 for Boston Scientific. We do not believe that this model accurately depicts Boston To calculate the cost of debt we took the risk-free rate Scientific’s stock price given that Boston Scientific and added the implied default risk premium that we got does not give dividends. from using the YTM on bonds that were issued for 10 years by BSX of 3.40%. We used BSX’s marginal tax rate of 22% to calculate the company’s cost of debt Sensitivity Analysis which is 3.12%. We tested various assumptions that we built into our Capital Expenditures model in order to observe the impact on our calculated intrinsic value. This was important to calculate our DCF To calculate out capital expenditures, we took the and EP model’s sensitivity to each assumption. growth in gross property, plant, and equipment, and wanted to grow that at around 9%. We took the Beta vs. Equity Risk Premium moving average in capital expenditures growth that we calculated from the cash flow statement. After using The assumption we choose for Equity Risk Premium that to calculate out our capital expenditure value for takes into effect the volatile and uncertain times we are our forecast, and adding that to property, plant, and facing due to COVID-19 and the low interest rates. We equipment while factoring in depreciation, we were believe that the ERP is 6.16%, which is the geometric able to end up with a growth rate of 9.37% in 2020. average MRP from 1928-2019. This growth slowly increased to 10% in 2025. As the risk premium continues to decrease, our stock Valuation (DDM, DCF, EP) price can be seen to increase due to a lower cost of capital. Out discounted cash flows and economic profit models resulted in an intrinsic value of $47.40 for Boston Scientific. We calculated out free cash flows for a six- year term because of BSX’s continuing growth of market share. We forecasted out a continuing value in 2026 using a 4.06% continuing value growth rate of

NOPLAT given at the continuing value year which we believe is the correct growth. We discounted the free CV Growth of NOPLAT vs. WACC cash flows and the continuing value by the WACC to get the present value of operations. We then The weighted average cost of capital plays an important subtracted out the current value of operating leases, role in determining the intrinsic value of our model and debt, and employee stock options to get the value of helps drive our forecasts for economic profit. Adding equity. After taking the value of equity divided by the another measure like Growth of NOPLAT can help us current shares outstanding, we had to make a partial measure the capital structure of BSX. Just a 1% change

Important disclosures appear on the last page of this report. 9 in NOPLAT changes the intrinsic value over $20, demonstrating the importance of FCF and its effect on value.

Pre-Tax Cost of Debt vs. Research and Development

We felt the pre-tax cost of debt variable was an important assumption to test as it is a direct driver in Risk-Free Rate vs. Cost of Goods Sold computing WACC. While R&D for some companies in our industry like Stryker and Baxter are not as The Risk-Free Rate is an important assumption that we important, BSX spends over 1 billion dollars on R&D a should test because it has a large impact on Boston year and continues to up those amounts to continue Scientific’s WACC. We used the current 10-year innovating. treasury yield of .6%, which at the moment is extremely low and wanted to see what the calculated price would As the pre-tax cost of debt decreases, you can see a be in a more normal environment, as well as an small change in value. What we found interesting is environment similar to some European countries. the small amount our intrinsic value moved by when increasing R&D by 1.50%. Leading us to believe BSX Cost of goods sold was an interesting variable to test as could afford to increase R&D in aiding their efforts to it doesn’t directly contribute to many ratios, especially achieve their long-term growth goals. with valuation, but still has a very large impact on EP. We thought of this comparison as one that companies may overlook, and wanted to test the results.

The difference in the Risk-Free Rate assumption had a big impact on the intrinsic value of the firm. In a more normal environment Boston Scientific’s target price would have been lower by $10.

As RFR grew larger, COGS impact on EP got lower overtime, proving its impact in these low-rate economic times.

Marginal Tax Rate vs. SG&A Growth

We felt the Marginal tax rate assumption was important to test as it has varied in the past and will likely change in the future as well. Our current assumption is 22% based off of BSX 2019 Marginal tax rate. Both indicators had less of an impact then we had imagined after testing.

Important disclosures appear on the last page of this report. 10

Important Disclaimer

This report was created by students enrolled in the Applied Equity Valuation (FIN:4250) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

Important disclosures appear on the last page of this report. 11

References https://www.macrotrends.net/countries/USA/united- states/life-expectancy

1 The Top 10 Cardio Device Companies: Highlights 13. Consumer Price Index Summary. (2020, April 10). from TCT. (2018, March 7). Retrieved from Retrieved from https://www.mddionline.com/top-10-cardio-device- https://www.bls.gov/news.release/cpi.nr0.htm companies-highlights-tct 14. FRED Graph Download. (n.d.). Retrieved from 2. Tippmann, N. (n.d.). Medical Device Companies - https://fred.stlouisfed.org/graph/?g=q2ZS Top 100 in 2020 (Free Chart). Retrieved from https://www.greenlight.guru/blog/top-100-medical- 15. Services, M. B. (2020, March 16). How does a device-companies Recession Impact Healthcare Providers? - Medical Billing. Retrieved from https://abcsrcm.com/how-does- 3. Whooley, S. (2020, April 15). BREAKING: FDA a-recession-impact-healthcare-providers/ authorizes U of Minnesota, Boston Scientific's low-cost ventilator. Retrieved from 16. Unemployment Rate. (2020, April 3). Retrieved https://www.massdevice.com/breaking-fda-authorizes- from https://fred.stlouisfed.org/series/UNRATE#0 u-of-minnesota-boston-scientifics-low-cost-ventilator/ 17. Stovall, S. (2019, September). 4. Features. (2020). Retrieved from https://news.bostonscientific.com/caring-value 18. Mikulic, M. (2020, February 27). Abbott Laboratories segment revenues 2017-2019. Retrieved 5. How much does the federal government spend on from health care? (2018). Retrieved from https://www.statista.com/statistics/266578/abbotts- https://www.taxpolicycenter.org/briefing-book/how- revenue-by-segment/5 much-does-federal-government-spend-health-care 15. About. (2020). Retrieved from 6. HealthLeaders. (n.d.). Healthcare Spending at 20% https://www.stryker.com/us/en/about.html of GDP? That's an Economy-Wide Problem. Retrieved from 19. Baxter International. (2020, April 21). Retrieved https://www.healthleadersmedia.com/finance/healthcar from https://www.forbes.com/companies/baxter- e-spending-20-gdp-thats-economy-wide-problem international/#351fcd942319

7. How Do Rate Cuts Impact Healthcare Stocks? 21. MDT's Competition by Segment and its Market (2019, June 19). Retrieved from Share. (n.d.). Retrieved April 21, 2020, from https://marketrealist.com/2019/06/how-do-rate-cuts- https://csimarket.com/stocks/competitionSEG2.php?co impact-healthcare-stocks/ de=MDT

8. CME FedWatch Tool: Countdown to FOMC - CME 22. WATCHMAN™. (n.d.). Retrieved from Group. (2020). Retrieved from https://www.bostonscientific.com/en-EU/products/laac- https://www.cmegroup.com/trading/interest- system/watchman.html rates/countdown-to-fomc.html 23. Features. (2019). Retrieved April 21, 2020, from 9. Cnbc. (2020). US10Y: U.S. 10 Year Treasury - https://news.bostonscientific.com/clarivate-innovation- Stock Price, Quote and News. Retrieved from award-2019 https://www.cnbc.com/quotes/?symbol=US10Y 24. (n.d.). Retrieved from 10. Howard, J. (2020, January 30). US life expectancy https://my.apps.factset.com/navigator/company- climbs for the first time in four years. Retrieved from security/snapshot/BSX-US 10. https://www.cnn.com/2020/01/30/health/us-life- expectancy-drug-overdose-deaths-cdc- 25. Center for Drug Evaluation and Research. “New study/index.html Drug Therapy Approvals 2019.” U.S. Food and Drug Administration, FDA, www.fda.gov/drugs/new-drugs- 11. Bauer, E. (2019, November 30). Another Record fda-cders-new-molecular-entities-and-new-therapeutic- Low: Will The U.S. Fertility Rate's Collapse Ever End? biological-products/new-drug-therapy-approvals-2019 Retrieved from https://www.forbes.com/sites/ebauer/2019/11/30/anoth 26. Boston Scientific Corporation. (2019) Annual er-record-low-will-the-us-fertility-rates-collapse-ever- Report Form 10-K. Retrieved from end/#3dd33de35e45 http://investors.bostonscientific.com/financials-and- 12. U.S. Life Expectancy 1950-2020. (n.d.). Retrieved filings/annual-results-and-proxy-statements from 26. Bloomberg Terminal

Important disclosures appear on the last page of this report. 12

Boston Scientific Corporation Income Statement

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026CV Net sales 9048 9823 10735 11486 12405 13717 15055 16404 17525 18600 Cost of products sold 2314 2517 2805 3086 3332 3582 3851 4207 4575 4982 Gross profit 6455 7011 7620 8401 9073 10135 11204 12196 12950 13618 Depreciation Expense 279 296 311 368 389 413 441 478 525 578 Selling, general & administrative expenses 3294 3569 3941 4505 4280 4572 5021 5645 6198 6546 Research & development expenses 997 1113 1174 1322 1428 1579 1733 1881 2006 2118 Royalty expense 68 70 65 77 72 72 71 71 71 72 Amortization expense 565 599 699 705 865 787 725 671 626 589 Goodwill impairment charges 0 0 0 0 0 0 0 0 0 0 Intangible asset impairment charges 4 35 105 65 65 69 62 63 50 53 Contingent consideration expense (benefit) 80 21 35 41 44 35 39 40 40 39 Restructuring and Acquisition charges (credits) 37 36 38 33 34 36 35 35 35 35 Litigation-related charges (credits) 285 103 115 168 129 137 144 137 139 140 Gain on divestiture 0 0 0 0 0 0 0 0 0 0 Total operating expenses 5170 5504 6102 7284 7305 7700 8272 9021 9690 10171 Operating income (loss) 1285 1506 1518 1117 1768 2434 2933 3175 3260 3447 Interest expense 229 241 473 500 430 418 358 398 367 385 Other income (expense), net -102 156 -358 -148 43 124 157 256 314 396 Income (loss) before income taxes 933 1422 687 764 1294 1892 2418 2521 2579 2666 Income tax expense (benefit) 828 -249 -4013 191 324 473 604 630 645 666 Net income (loss) 104 1671 4700 573 971 1419 1813 1891 1935 1999 Basic EPS $ 0.08 $ 1.21 $ 3.38 0.91 0.94 1.11 1.38 1.44 1.38 1.40 Weighted Average Shares Outstanding 1370 1381 1392 1396 1401 1406 1411 1416 1421 1426 Boston Scientific Corporation Balance Sheet

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026CV Cash & cash equivalents 188 146 217 841 2462 3459 6686 8507 11147 13535 Trade accounts receivable, net 1548 1608 1828 1947 2103 2334 2565 2774 2979 3160 Inventories 1078 1166 1579 1432 1560 1730 1904 2077 2216 2334 Deferred & prepaid income taxes 66 161 195 226 262 303 351 407 471 545 Assets held for sale 0 0 0 0 0 0 0 0 0 0 Restricted cash 0 0 0 0 0 0 0 0 0 0 Other current assets 942 921 880 671 768 898 1026 1160 1258 1378 Total current assets 3822 4002 4699 5117 7155 8723 12532 14924 18071 20953 Property, plant & equipment, gross 4625 4740 5169 5653 6180 6752 7395 8130 8956 9899 Accumulated Depreciation 2928 2958 3089 3457 3846 4259 4701 5179 5703 6281 Property, plant & equipment, net 1697 1782 2079 2196 2333 2492 2694 2951 3253 3618 Goodwill 6998 7911 10176 10176 10176 10176 10176 10176 10176 10176 Other intangible assets, net 5837 6372 7886 7345 6688 6104 5603 5184 4841 4490 Deferred Tax asset 88 87 4196 3986 3787 3598 3418 3247 3084 2930 Other long term assets 600 845 1529 1605 1686 1770 1859 1951 2049 2151 Total assets 19042 20999 30565 30426 31824 32863 36280 38434 41474 44318 Current debt obligations 1801 2253 1416 0 1500 244 850 Accounts payable 530 349 542 434 487 555 622 689 748 821 Accrued expenses 2456 2246 2109 2582 2809 3178 3571 3970 4202 4416 Other current liabilities 867 412 $800 878 926 977 1030 1086 1145 1208 Total current liabilities 5654 5260 4867 3895 5722 4954 6073 5745 6095 6445 Long-term debt 3815 4803 8592 8605 6865 6920 7102 7344 7709 7807 Deferred income taxes 191 328 595 705 836 991 1174 1392 1650 1955 Other long-term liabilities 2370 1882 2635 2751 2941 3099 3199 3310 3424 3514 Total Liabilities 12030 12273 16689 15957 16364 15964 17549 17792 18878 19721 Treasury stock, at cost -1717 -1717 -1717 -1717 -1717 -1717 -1717 -1717 -1717 -1717 CS and Additional paid-in capital 17177 17362 17577 17597 17616 17636 17656 17676 17695 17697 Retained earnings (accumulated deficit) -8390 -6953 -2253 -1680 -709 710 2523 4414 6348 8348 AOCI -59 33 270 270 270 270 270 270 270 270 Total stockholders' equity 7011 8725 13877 14470 15460 16899 18732 20642 22597 24598 Total Liabilities and Stockholders Equity 19041 20998 30565 30426 31824 32863 36280 38434 41474 44318 Boston Scientific Corporation Revenue Decomposition (in millions) Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026CV Endoscopy U.S. $ 894 $ 980 $ 1,080 $ 1,140 $ 1,238 $ 1,409 $ 1,577 $ 1,735 $ 1,856 $ 1,997 International 724 781 814 859 933 1,062 1,189 1,307 1,399 1,505 Worldwide 1,619 1,762 1,894 2,000 2,170 2,471 2,766 3,042 3,255 3,503 Growth Rates 12.43% 8.83% 7.49% 5.58% 8.53% 13.84% 11.96% 9.98% 7.01% 7.60%

Urology and Pelvic Health U.S. 785 864 1,005 1,075 1,177 1,317 1,495 1,623 1,755 1,886 International 339 381 408 436 478 534 607 659 712 766 Worldwide 1,124 1,245 1,413 1,511 1,655 1,851 2,102 2,282 2,468 2,652 Growth Rates 11.84% 10.77% 13.49% 6.94% 9.50% 11.87% 13.56% 8.56% 8.13% 7.48%

Cardiac Rhythm Management U.S. 1,135 1,159 1,135 1,101 1,109 1,155 1,167 1,180 1,169 1,168 International 760 792 804 780 786 818 826 836 828 827 Worldwide 1,895 1,951 1,939 1,881 1,895 1,973 1,993 2,016 1,997 1,995 Growth Rates 2.43% 2.96% -0.62% -3.00% 0.75% 4.12% 1.01% 1.15% -0.95% -0.09%

Electrophysiology U.S. 136 150 148 155 163 174 192 210 227 244 International 142 161 180 188 198 211 233 256 276 296 Worldwide 278 311 329 343 360 385 425 466 504 540 Growth Rates 14.40% 11.87% 5.79% 4.56% 5.07% 6.84% 10.39% 9.65% 8.11% 7.18%

Neuromodulation U.S. 517 624 695 738 799 898 988 1,123 1,207 1,301 International 118 155 178 189 205 230 253 287 309 333 Worldwide 635 779 873 927 1,004 1,129 1,241 1,410 1,516 1,634 Growth Rates 14.21% 22.68% 12.07% 6.19% 8.25% 12.46% 10.00% 13.58% 7.50% 7.78%

Interventional Cardiology U.S. 1,122 1,154 1,293 1,404 1,531 1,708 1,883 2,069 2,238 2,372 International 1,297 1,436 1,522 1,652 1,802 2,010 2,216 2,435 2,634 2,793 Worldwide 2,419 2,590 2,816 3,056 3,333 3,718 4,099 4,504 4,872 5,165 Growth Rates 6.05% 7.07% 8.73% 8.56% 9.05% 11.56% 10.24% 9.89% 8.17% 6.02%

Peripheral Interventions U.S. 575 608 741 785 836 919 1,021 1,131 1,232 1,317 International 506 579 651 689 734 807 897 994 1,083 1,157 Worldwide 1,081 1,187 1,392 1,474 1,570 1,726 1,918 2,124 2,315 2,473 Growth Rates 6.92% 9.81% 17.27% 5.89% 6.51% 9.97% 11.07% 10.79% 8.96% 6.85%

Total Company U.S. $ 5,162 $ 5,538 $ 6,167 $ 6,397 $ 6,852 $ 7,579 $ 8,322 $ 9,070 $ 9,684 $ 10,285 International 3,885 4,286 4,569 4,794 5,135 5,673 6,221 6,774 7,242 7,677 Net Sales 9,047 9,824 10,735 11,192 11,986 13,252 14,544 15,845 16,926 17,962 Growth Rates 7.88% 8.59% 9.27% 4.25% 7.10% 10.56% 9.74% 8.95% 6.83% 6.12% Boston Scientific Corporation Historical Cash Flow Statement

Fiscal Years Ending Dec. 31 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Cash Flow From Operations Net income (loss) -1025 -1065 441 -4068 -121 -119 -239 347 104 1671 4700 Loss (gain) on sale of businesses - - -778 -15 -38 -12 - - - - - Loss (gain) on sale of property, plant & equipment ------11 - - - Depreciation & amortization 834 816 717 683 689 725 769 815 844 894 1011 Deferred & prepaid income taxes -64 -110 46 -166 -223 -397 -532 -305 245 -87 -4301 Stock-based compensation expense 144 150 128 108 105 103 107 116 127 140 157 Goodwill impairment charges - 1817 697 4350 423 ------Intangible asset impairment charges 12 65 21 142 53 195 19 11 4 35 105 Net losses (gains) on investments & notes receivable -9 12 -27 -37 9 -27 9 21 92 -155 30 Contingent consideration expense (benefit) - - 7 -6 4 -85 123 29 -80 -21 -35 Payment of contingent consideration in excess of amount recognized at acquisition - - - -8 -5 -103 -57 -57 -14 -9 -6 Pension termination charges ------44 - - - - Inventory step-up amortization ------36 22 10 6 46 Other adjustments, net 1 13 -7 -7 31 27 41 -12 27 -3 63 Trade accounts receivable - 52 42 37 -101 53 -17 -216 -30 -110 -130 Inventories -92 -5 -54 66 -7 -81 3 40 -107 -83 -290 Other assets 297 132 -60 -68 91 -33 -23 -253 -20 -172 45 Accounts payable & accrued expenses 462 -1148 -271 -131 -37 620 -20 553 195 -631 111 Other liabilities 278 -404 106 380 209 403 337 -128 28 -1164 -18 Other operating activities, net -3 ------Net cash flows from operating activities 835 325 1008 1260 1082 1269 600 972 1426 310 1836 Cash Flow From Investing Purchases of property, plant & equipment -312 -272 -304 -226 -245 -259 -247 -376 -319 -316 -461 Proceeds on disposals of property, plant & equipment 5 5 16 16 53 0 0 29 0 14 7 Payments for acquisitions of businesses, net of cash acquired -4 -199 -370 -366 -274 -486 -1734 -408 -560 -1448 -4382 Proceeds from business divestitures, net of costs - - 1440 10 30 12 - - - - - Payments relating to prior year acquisitions -523 -12 ------Contingent payments related to acquisitions - - -7 ------Payments for investments & acquisitions of certain technologies -50 -6 -11 -22 -44 -26 -266 -132 -131 -172 -149 Proceeds from investments & collections of notes receivable 91 4 5 9 5 14 61 - - - Net cash flows from investing activities -793 -480 769 -579 -475 -745 -2186 -887 -1010 -1921 -5041 Cash Flow From Financing Payments on notes payable, capital leases & long-term borrowings -2825 ------Payments of contingent consideration amounts previously established in purchase accounting- - - -146 -160 -34 -156 -65 -33 -19 -135 Proceeds from short-term borrowings, net of debt issuance costs ------999 700 Net increase (decrease) in commercial paper ------1183 21 -575 Proceeds from borrowings on credit facilities - 200 565 371 340 810 565 630 2156 569 - Payments on borrowings from credit facilities - -200 -565 -380 -340 -810 -565 -570 -2216 -569 - Payments on short-term borrowings -1000 Payments on long-term borrowings - -1500 -1250 -10 -1450 - -1150 -250 -1000 -602 -3560 Proceeds from long-term borrowings, net of debt issuance & extinguishment costs1972 973 - - 1440 - 2580 - - 987 7229 Payments for acquisitions of treasury stock - - -492 -600 -500 -125 - - - - - Cash used to net share settle employee equity awards ------51 -66 -62 -65 -56 -65 Proceeds from issuances of shares of common stock 33 31 21 21 74 60 114 111 85 101 123 Net cash flows from financing activities -820 -496 -1721 -744 -596 -150 1322 -206 110 1432 2973 Effect of foreign exchange rates on cash 1 - -2 3 -1 -4 -4 -2 4 -8 10 Net increase (decrease) in cash & cash equivalents -777 -651 54 -60 10 370 -268 -123 530 -188 -222 Cash & cash equivalents at beginning of period 1641 864 213 267 207 217 587 319 487 1017 829 Cash & cash equivalents at end of period 864 213 267 207 217 587 319 196 1017 829 607 Cash paid (received) for income taxes, net 46 -286 138 97 67 74 80 94 -42 1037 242 Boston Scientific Corporation Forecasted Cash Flow Statement

Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024E 2025E 2026CV Cash Flow From Operations Net income (loss) 573 971 1419 1813 1891 1935 1999 Depreciation Expense 368 389 413 441 478 525 578 Amortization expense 705 865 787 725 671 626 589 Change in deferred taxes 320 330 344 363 388 420 460 Change in Receivables -119 -156 -231 -231 -209 -205 -182 Change in Inventory 147 -127 -170 -175 -172 -139 -118 Change in Prepaid and other current assets 209 -97 -130 -128 -134 -98 -120 Change in AP -108 52 69 67 67 59 73 Change in accrued Expenses 473 227 369 392 399 232 214 Change in other liabilities 78 48 50 53 56 59 62 Change in Prepaid taxes? -31 -36 -41 -48 -56 -64 -75 Net Cash from operations 2615 2465 2880 3273 3379 3349 3481 Cash Flow From Investing Purchase of P,P,&E -484 -526 -572 -643 -735 -826 -942 Change in other assets -76 -80 -84 -89 -93 -98 -102 Purchase of Intangibles -164 -207 -204 -223 -252 -283 -239 Net Cash Used in investing activities -725 -814 -860 -954 -1081 -1206 -1283 Cash Flow From Financing Changes in current portion of long-term debt -1416 1500 -1256 606 -850 0 0 proceeds from issuance of common stock 20 20 20 20 20 20 2 changes in AOCI 0 0 0 0 0 0 0 Proceeds from issuance (payment) of long term debt 13 -1740 55 182 242 364 98 Other Long-Term liabilities 116 190 158 100 111 114 90 Net Cash Used in Financing Activities -1267 -31 -1023 908 -477 498 190

Cash at beginning of 2020 217 841 2462 3459 6686 8507 11147 Total cash inflow 624 1621 997 3227 1821 2640 2388 Cash at end of 2020 841 2462 3459 6686 8507 11147 13535 Boston Scientific Corporation Common Size Income Statement

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026CV Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of products sold 25.57% 25.62% 26.13% 26.86% 26.86% 26.12% 25.58% 25.65% 26.11% 26.79% Gross profit 71.34% 71.37% 70.98% 73.14% 73.14% 73.88% 74.42% 74.35% 73.89% 73.21% Depreciation Expense 3.08% 3.01% 2.90% 3.21% 3.14% 3.01% 2.93% 2.91% 2.99% 3.11% Selling, general & administrative expenses 36.41% 36.33% 36.71% 39.22% 34.50% 33.33% 33.35% 34.41% 35.37% 35.20% Research & development expenses 11.02% 11.33% 10.94% 11.51% 11.51% 11.51% 11.51% 11.47% 11.45% 11.39% Royalty expense 0.75% 0.71% 0.61% 0.67% 0.58% 0.52% 0.47% 0.43% 0.41% 0.39% Amortization expense 6.24% 6.10% 6.51% 6.13% 6.97% 5.74% 4.81% 4.09% 3.57% 3.17% Intangible asset impairment charges 0.04% 0.36% 0.98% 0.57% 0.52% 0.51% 0.41% 0.38% 0.28% 0.28% Contingent consideration expense (benefit) 0.88% 0.21% 0.33% 0.36% 0.36% 0.26% 0.26% 0.24% 0.23% 0.21% Restructuring and Acquisition charges (credits) 0.41% 0.37% 0.35% 0.29% 0.28% 0.26% 0.24% 0.22% 0.20% 0.19% Litigation-related charges (credits) 3.15% 1.05% 1.07% 1.46% 1.04% 1.00% 0.96% 0.83% 0.80% 0.75% Total operating expenses 57.14% 56.03% 56.84% 63.42% 58.88% 56.14% 54.94% 54.99% 55.29% 54.68% Operating income (loss) 14.20% 15.33% 14.14% 9.72% 14.25% 17.75% 19.48% 19.36% 18.60% 18.53% Interest expense 2.53% 2.45% 4.41% 4.36% 3.47% 3.05% 2.38% 2.42% 2.10% 2.07% Other income (expense), net -1.13% 1.59% -3.33% -1.29% 0.35% 0.91% 1.04% 1.56% 1.79% 2.13% Income (loss) before income taxes 10.31% 14.48% 6.40% 6.65% 10.43% 13.79% 16.06% 15.37% 14.72% 14.33% Income tax expense (benefit) 9.15% -2.53% -37.38% 1.66% 2.61% 3.45% 4.01% 3.84% 3.68% 3.58% Net income (loss) 1.15% 17.01% 43.78% 4.99% 7.83% 10.34% 12.04% 11.53% 11.04% 10.75% Boston Scientific Corporation Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026CV Cash & cash equivalents 2.08% 1.49% 2.02% 7.32% 19.85% 25.21% 44.41% 51.86% 63.61% 72.77% Trade accounts receivable, net 17.11% 16.37% 17.03% 16.95% 16.95% 17.01% 17.04% 16.91% 17.00% 16.99% Inventories 11.91% 11.87% 14.71% 12.47% 12.57% 12.61% 12.65% 12.66% 12.64% 12.55% Deferred & prepaid income taxes 0.73% 1.64% 1.82% 1.97% 2.11% 2.21% 2.33% 2.48% 2.69% 2.93% Assets held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Restricted cash 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other current assets 10.41% 9.38% 8.20% 5.84% 6.19% 6.55% 6.81% 7.07% 7.18% 7.41% Total current assets 42.24% 40.74% 43.77% 44.55% 57.67% 63.59% 83.24% 90.98% 103.11% 112.65% Property, plant & equipment, gross 51.12% 48.25% 48.15% 49.22% 49.81% 49.22% 49.12% 49.56% 51.11% 53.22% Accumulated Depreciation 32.36% 30.11% 28.78% 30.10% 31.00% 31.05% 31.22% 31.57% 32.54% 33.77% Property, plant & equipment, net 18.76% 18.14% 19.37% 19.12% 18.81% 18.17% 17.89% 17.99% 18.56% 19.45% Goodwill 77.34% 80.54% 94.79% 88.59% 82.03% 74.18% 67.59% 62.03% 58.07% 54.71% Other intangible assets, net 64.51% 64.87% 73.46% 63.95% 53.91% 44.50% 37.21% 31.60% 27.62% 24.14% Other long term assets 6.63% 8.60% 14.24% 13.98% 13.59% 12.90% 12.34% 11.90% 11.69% 11.57% Total assets 210.46% 213.77% 284.72% 264.89% 256.54% 239.57% 240.98% 234.30% 236.65% 238.27% Current debt obligations 19.90% 22.94% 13.19% 0.00% 12.09% 1.78% 5.65% 0.00% 0.00% 0.00% Accounts payable 5.86% 3.55% 5.05% 3.78% 3.92% 4.05% 4.13% 4.20% 4.27% 4.41% Accrued expenses 27.14% 22.86% 19.65% 22.48% 22.65% 23.17% 23.72% 24.20% 23.98% 23.74% Other current liabilities 9.58% 4.19% 7.45% 7.65% 7.47% 7.12% 6.84% 6.62% 6.53% 6.49% Total current liabilities 62.49% 53.55% 45.34% 33.91% 46.13% 36.12% 40.34% 35.02% 34.78% 34.65% Long-term debt 42.16% 48.90% 80.04% 74.91% 55.34% 50.45% 47.17% 44.77% 43.99% 41.97% Deferred income taxes 2.11% 3.34% 5.54% 6.14% 6.74% 7.22% 7.80% 8.48% 9.41% 10.51% Other long-term liabilities 26.19% 19.16% 24.55% 23.95% 23.71% 22.59% 21.25% 20.18% 19.54% 18.89% Total Liabilities 132.96% 124.94% 155.46% 138.92% 131.91% 116.38% 116.56% 108.46% 107.72% 106.02% Treasury stock, at cost -18.98% -17.48% -15.99% -14.95% -13.84% -12.52% -11.40% -10.47% -9.80% -9.23% Additional paid-in capital 189.84% 176.75% 163.74% 153.20% 142.01% 128.57% 117.27% 107.75% 100.97% 95.15% Retained earnings (accumulated deficit) -92.73% -70.78% -20.99% -14.63% -5.72% 5.17% 16.76% 26.91% 36.22% 44.88% AOCI -0.65% 0.34% 2.52% 2.35% 2.18% 1.97% 1.79% 1.65% 1.54% 1.45% Total stockholders' equity 77.49% 88.82% 129.27% 125.97% 124.62% 123.19% 124.42% 125.84% 128.94% 132.25% Total Liabilities and Stockholders Equity 210.44% 213.76% 284.72% 264.89% 256.54% 239.57% 240.98% 234.30% 236.65% 238.27% Boston Scientific Corporation Key Management Ratios

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026CV

Liquidity Ratios: Cash Ratio 0.03 0.03 0.04 0.22 0.43 0.70 1.10 1.48 1.83 2.10 Current Ratio 1.58 1.71 1.83 1.91 1.94 2.06 2.07 2.16 2.20 2.25 Quick Ratio 0.31 0.33 0.42 0.72 0.80 1.17 1.52 1.96 2.32 2.59

Asset-Management Ratios: Accounts Receivable Turnover 3.96 4.15 4.36 4.50 4.68 4.97 5.25 5.52 5.71 5.89 Fixed Asset Turnover 1.96 2.07 2.08 2.03 2.01 2.03 2.04 2.02 1.96 1.88 Inventory Turnover 1.36 1.42 1.51 1.63 1.69 1.75 1.81 1.90 2.01 2.13

Financial Leverage Ratios: Debt Ratio 0.63 0.58 0.55 0.52 0.51 0.49 0.48 0.46 0.46 0.44 Debt-to-Equity Ratio 1.72 1.41 1.20 1.10 1.06 0.94 0.94 0.86 0.84 0.80 Equity Ratio 0.37 0.42 0.45 0.48 0.49 0.51 0.52 0.54 0.54 0.56

Profitability Ratios: Gross Profit Margin 71.34% 71.37% 70.98% 73.14% 73.14% 73.88% 74.42% 74.35% 73.89% 73.21% Return on Asset 0.55% 7.96% 15.38% 11.88% 8.05% 9.32% 10.00% 9.92% 9.66% 9.51% Return on Equity 1.48% 19.15% 33.87% 13.96% 6.28% 11.40% 9.68% 10.16% 16.56% 18.13% Net Profit Margin 1.15% 17.01% 43.78% 4.99% 7.83% 10.34% 12.04% 11.53% 11.04% 10.75%

Definitions: Cash Ratio = Cash / Total Current Liabilities Current Ratio = Total Assets / Total Liabilities Quick Ratio = Cash + Accounts Receivable + Investments / Total Current Liabilities Accounts Receivable Turnover = Revenue / Average Accounts Receivable Fixed Asset Turnover = Total Revenue / PPE Inventory Turnover = COGS / Average Inventory Debt Ratio = Total Liabilties / Total Assets Debt to Equity = Total Liabilties / Total Equity Equity Ratio = Total Equity / Total Assets Gross Profit Margin = (Revenue - COGS) / Revenue Return on Assets = Net Income / Total Assets Return on Equity = Net Income / Total Equity Net Profit Margin = Net Income / Revenue Boston Scientific Corporation Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024E 2025E 2026CV

EPS $ 0.91 $ 0.94 $ 1.11 $ 1.38 $ 1.44 $ 1.38 $ 1.40

Key Assumptions CV Growth of EPS 4.00% CV Year ROE 18.13% Cost of Equity 7.24%

Future Cash Flows P/E Multiple (CV Year) 24.07 EPS (CV Year) $ 1.40 Future Stock Price $ 33.75 Dividends Per Share 0 0 0 0 0 0 Discount Rate 1.07 1.15 1.23 1.32 1.42 1.52 1.52 Discounted Cash Flows $ 22.19

Intrinsic Value as of Last FYE $ 22.19 Implied Price as of Today $ 22.67 Boston Scientific Corporation Relative Valuation Models

Mkt EPS EPS Ticker Company Price Cap 2020E 2021E P/E 20 P/E 21 BV Equity ABT Abbot Laboratories $82.60 144.50 $3.23 $3.82 25.40 21.40 16.00 BAX Baxter International $83.64 41.85 $3.52 $3.98 23.40 20.70 EW Edwards Lifesciences $199.54 40.37 $5.56 $6.71 35.00 29.00 16.00 RMD ResMed Inc $151.51 22.23 $4.24 $4.76 35.50 31.90 16.00 SYK Stryker $174.81 65.52 $7.56 $9.13 35.00 24.60 16.00 MDT Medtronic Plc $97.01 126.60 $5.44 $5.66 17.40 16.70 16.00 Average 28.62 24.05

BSX Boston Scientific Corporation $34.55 47.14 $0.91 $0.94 38.0 36.6 20.00

Implied Relative Value: P/E (EPS20) $ 26.05 P/E (EPS21) $ 22.68 PEG (EPS21) $ 23.31 P/Tangible BV $ 176.37 Boston Scientific Corporation Weighted Average Cost of Capital (WACC) Estimation

Cost of Equity: ASSUMPTIONS: Risk-Free Rate 0.60% 10-year Treasury Bond Beta 1.08 Average of 2,3,4, and 5 year weekly betas Equity Risk Premium 6.16% Average of Geometric average MRP from 1928-2019 Cost of Equity 7.24%

Cost of Debt: Risk-Free Rate 0.60% Implied Default Premium 3.40% Using YTM on bonds issued by BSX Pre-Tax Cost of Debt 4.00% YTM on bonds maturing in 9 and 10 years Marginal Tax Rate 22% After-Tax Cost of Debt 3.12%

Market Value of Common Equity: MV Weights Total Shares Outstanding 1,396,195,349 Current Stock Price $34.55 MV of Equity 48,238,549,307.95 81.40%

Market Value of Debt: MV of Total Debt 11,020,000,000.00 18.60%

Market Value of the Firm 59,258,549,307.95 100.00%

Estimated WACC 6.47% Boston Scientific Corporation Value Driver Estimation

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026CV

NOPLAT: Operating Revenues 9048 9823 10735 11486 12405 13717 15055 16404 17525 18600 COGS -2314 -2517 -2805 -3086 -3332 -3582 -3851 -4207 -4575 -4982 SG&A -3294 -3569 -3941 -4505 -4280 -4572 -5021 -5645 -6198 -6546 Depreciation and Amortization -844 -894 -1011 -368 -389 -413 -441 -478 -525 -578 R&D -997 -1113 -1174 -1322 -1428 -1579 -1733 -1881 -2006 -2118 Implied interest on operating leases 10 11 12 13 13 15 16 17 19 21 EBITA 1609 1741 1816 2218 2989 3586 4025 4209 4240 4396 Marginal Tax Rate 0 0 0 0 0 0 0 0 0 0 Income tax provision 828 -249 -4013 191 324 473 604 630 645 666 Tax shield on interest expense -10 33 9 125 108 105 90 99 92 96 Tax shield on amortized goodwill 0 0 0 0 0 0 0 0 0 0 Tax Non-Operating Income (including interest income) 5 21 -7 -37 11 31 39 64 78 99

Total Adjusted Taxes 822 -195 -4011 279 442 609 733 794 815 862 Change in Deferred Taxes 182 42 233 79 95 113 136 162 194 231 Implied interest on operating leases 2 2 3 3 3 3 4 4 4 5 NOPLAT: 969 1978 6060 2018 2642 3091 3427 3577 3618 3765

Invested Capital (IC): Operating Current Assets Cash & cash equivalents 188 146 217 841 2462 3459 6686 8507 11147 13535 Trade accounts receivable, net 1548 1608 1828 1947 2103 2334 2565 2774 2979 3160 Inventories 1078 1166 1579 1432 1560 1730 1904 2077 2216 2334 Prepaid income taxes 66 161 195 226 262 303 351 407 471 545 Prepaid expenses & other current assets 942 921 880 671 768 898 1026 1160 1258 1378 Total Operating Current Assets: 3822 4002 4699 5117 7155 8723 12532 14924 18071 20953 Operating Current Liabilities Accounts payable 530 349 542 434 487 555 622 689 748 821 Accrued expenses 2456 2246 2109 2582 2809 3178 3571 3970 4202 4416 Other current liabilities 867 412 800 878 926 977 1030 1086 1145 1208 Total Operating Current Liabilties: 3853 3007 3451 3895 4222 4710 5223 5745 6095 6445 Net Operating Working Capital -31 995 1248 1222 2932 4012 7309 9179 11975 14508 Net PP&E 1697 1782 2079 2196 2333 2492 2694 2951 3253 3618 Plus: Other Long Term Operating Assets Capitalized PV of Operating Leases 274 311 335 326 337 353 370 391 420 453 Intangible Assets, net 5837 6372 7886 7345 6688 6104 5603 5184 4841 4490 Other Operating Assets Total Other Long Term Operating Assets 11202 12029 14458 14260 14025 13935 14054 14430 15020 15796 Less: Other Long Term Operating Liabilties Other Liabilties 28 -1164 -18 116 190 158 100 111 114 90 Total Other Long Term Operating Liabilties -28 1164 18 -116 -190 -158 -100 -111 -114 -90 Invested Capital 11143 14188 15724 15366 16768 17789 21263 23498 26882 30214

Free Cash Flow (FCF): NOPLAT 969 1978 6060 2018 2642 3091 3427 3577 3618 3765 Change in IC 399 3044 1536 -358 1402 1021 3474 2234 3384 3332 FCF 570 -1066 4524 2377 1240 2069 -47 1343 234 433

Return on Invested Capital (ROIC): NOPLAT 969 1978 6060 2018 2642 3091 3427 3577 3618 3765 Beg. IC 10744 11143 14188 15724 15366 16768 17789 21263 23498 26882 ROIC 9.02% 17.75% 42.71% 12.84% 17.20% 18.43% 19.27% 16.82% 15.40% 14.01%

Economic Profit (EP): Beg. IC 10744 11143 14188 15724 15366 16768 17789 21263 23498 26882 x (ROIC - WACC) 2.55% 11.28% 36.24% 6.36% 10.72% 11.96% 12.79% 10.35% 8.93% 7.53% EP 274 1257 5142 1001 1648 2006 2276 2201 2098 2025 Boston Scientific Corporation Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth of NOPLAT 4.06% CV Year ROIC 14.01% WACC 6.47% Cost of Equity 7.24%

Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024E 2025E 2026E

DCF Model: Free Cash Flow (FCF) 2376.7 1240.3 2069.5 -47.1 1342.8 233.9 Continuing Value (CV) 110911.0 Discount Rate 1.06 1.13 1.21 1.29 1.37 1.46 1.46 PV of FCF 2232.2 1094.1 1714.6 -36.7 981.4 160.6 76130.2

Value of Operating Assets: 82276.4 Non-Operating Adjustments

Non operating Liabilities PV of Operating Leases $ (326.39) MV of Debt $ (11,020.00) Employee Stocks Options $ (6,150.87) Value of Equity $ 64,779.13 Shares Outstanding $ 1,396.20 Intrinsic Value of Last FYE $ 46.40 Implied Price as of Today $ 47.40

EP Model: Economic Profit (EP) 1000.7 1647.8 2005.5 2275.8 2201.0 2097.5 2025.5 Continuing Value (CV) 84029.0 Discount Rate 1.06 1.13 1.21 1.29 1.37 1.46 1.46 PV of EP 939.9 1453.6 1661.6 1770.9 1608.5 1439.8 57678.2

Total PV of EP 66552.5 Invested Capital (last FYE) 15723.9 Value of Operating Assets: 82276.4 Non-Operating Adjustments

Non operating Liabilities PV of Operating Leases $ (326.39) MV of Debt $ (11,020.00) Employee Stocks Options $ (6,150.87) Value of Equity $ 64,779.13 Shares Outstanding $ 1,396.20 Intrinsic Value of Last FYE $ 46.40 Implied Price as of Today $ 47.40 Boston Scientific Corporation Present Value of Operating Lease Obligations

Fiscal Years Ending Dec. 31 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year 1 76.0 83.0 73.0 69.0 64.0 59.0 58.0 66.0 72.0 73.0 84.0 Year 2 68.0 69.0 54.0 50.0 51.0 51.0 44.0 60.0 52.0 61.0 71.0 Year 3 52.0 46.0 35.0 40.0 43.0 34.0 36.0 42.0 40.0 47.0 59.0 Year 4 175.0 24.0 25.0 33.0 29.0 25.0 27.0 34.0 33.0 39.0 48.0 Year 5 100.0 15.0 22.0 23.0 25.0 21.0 21.0 25.0 28.0 31.0 41.0 Thereafter 290.0 45.0 38.0 44.0 42.0 28.0 43.0 64.0 93.0 111.0 79.0 Total Minimum Payments 761.0 282.0 247.0 259.0 254.0 218.0 229.0 291.0 318.0 362.0 382.0 Less: Cumulative Interest 126.1 30.4 26.7 29.6 29.0 23.3 26.9 36.0 43.6 51.4 47.1 PV of Minimum Payments 634.9 251.6 220.3 229.4 225.0 194.7 202.1 255.0 274.4 310.6 334.9

Implied Interest in Year 1 Payment 25.4 10.1 8.8 9.2 9.0 7.8 8.1 10.2 11.0 12.4

Pre-Tax Cost of Debt 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% Years Implied by Year 6 Payment 2.9 3.0 1.7 1.9 1.7 1.3 2.0 2.6 3.3 3.6 1.9 Expected Obligation in Year 6 & Beyond 100 15 22 23 25 21 21 25 28 31 41

Present Value of Lease Payments PV of Year 1 73.1 79.8 70.2 66.3 61.5 56.7 55.8 63.5 69.2 70.2 80.8 PV of Year 2 62.9 63.8 49.9 46.2 47.2 47.2 40.7 55.5 48.1 56.4 65.6 PV of Year 3 46.2 40.9 31.1 35.6 38.2 30.2 32.0 37.3 35.6 41.8 52.5 PV of Year 4 149.6 20.5 21.4 28.2 24.8 21.4 23.1 29.1 28.2 33.3 41.0 PV of Year 5 82.2 12.3 18.1 18.9 20.5 17.3 17.3 20.5 23.0 25.5 33.7 PV of 6 & beyond 220.9 34.2 29.6 34.2 32.8 22.0 33.3 49.1 70.3 83.5 61.3 Capitalized PV of Payments 634.9 251.6 220.3 229.4 225.0 194.7 202.1 255.0 274.4 310.6 334.9 Boston Scientific Corporation Effects of ESOP Exercise and Share Repurchases on Common Stock Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 2,992 Average Time to Maturity (years): 6.10 Expected Annual Number of Options Exercised: 490

Current Average Strike Price: $ 40.20 Cost of Equity: 7.24% Current Stock Price: $34.55

Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024E 2025E 2026CV Increase in Shares Outstanding: 490 490 490 490 490 490 490 Average Strike Price: $ 40.20 $ 40.20 $ 40.20 $ 40.20 $ 40.20 $ 40.20 $ 40.20 Increase in Common Stock Account: 19,718 19,718 19,718 19,718 19,718 19,718 1,972

Change in Treasury Stock 0 0 0 0 0 0 0 Expected Price of Repurchased Shares: $ 34.55 $ 37.05 $ 39.73 $ 42.61 $ 45.69 $ 49.00 $ 52.55 Number of Shares Repurchased: ------

Shares Outstanding (beginning of the year) 1,396 1,401 1,406 1,411 1,416 1,421 1,426 Plus: Shares Issued Through ESOP 490 490 490 490 490 490 490 Less: Shares Repurchased in Treasury ------Shares Outstanding (end of the year) 1,887 1,892 1,897 1,902 1,907 1,911 1,916 Boston Scientific Corporation Valuation of Options Granted under ESOP

Current Stock Price $34.55 Risk Free Rate 0.60% Current Dividend Yield 0.00% Annualized St. Dev. of Stock Returns 10.55%

Average Average B-S Value Range of Number Exercise Remaining Option of Options Outstanding Options of Shares Price Life (yrs) Price Granted Range 1 2,992 40.20 6.10 $ 2.06 $ 6,151 Total 2,992 $ 40.20 6.10 $ 2.06 $ 6,151 Boston Scientific Corporation Sensitivity Tables

Beta 47.40 0.84 0.92 1.00 1.08 1.16 1.24 1.32 5.86% 134.54 93.38 69.92 54.76 44.17 36.36 30.35 5.96% 125.03 87.81 66.16 52.00 42.03 34.62 28.91 6.06% 116.65 82.79 62.72 49.45 40.03 33.00 27.55 Equity Risk 6.16% 109.21 78.23 59.56 47.09 38.17 31.48 26.27 Premium 6.26% 102.56 74.07 56.64 44.89 36.43 30.05 25.07 6.36% 96.58 70.26 53.94 42.84 34.79 28.71 23.94 6.46% 91.18 66.77 51.44 40.92 33.26 27.44 22.86

CV Growth of NOPLAT 47.40 3.47% 3.67% 3.87% 4.07% 4.27% 4.47% 4.67% 6.17% 45.32 48.51 52.26 56.71 62.11 68.77 77.21 6.27% 43.11 46.01 49.40 53.40 58.20 64.07 71.41 6.37% 41.05 43.69 46.77 50.37 54.67 59.87 66.29 WACC 6.47% 39.12 41.55 44.34 47.60 51.46 56.08 61.74 6.57% 37.32 39.55 42.10 45.05 48.53 52.66 57.67 6.67% 35.64 37.68 40.01 42.70 45.84 49.55 54.01 6.77% 34.06 35.94 38.07 40.53 43.37 46.72 50.70

Risk Free Rate 47.40 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 9.25% 70.08 62.67 56.35 50.90 46.13 41.90 38.13 9.50% 68.06 60.99 54.94 49.69 45.09 41.00 37.35 9.75% 66.13 59.37 53.58 48.53 44.08 40.13 36.58 COGS (2020) 10.00% 64.28 57.83 52.26 47.40 43.11 39.28 35.83 10.25% 62.50 56.34 50.99 46.31 42.16 38.45 35.10 10.50% 60.81 54.90 49.77 45.25 41.24 37.64 34.39 10.75% 59.18 53.52 48.59 44.23 40.35 36.86 33.70

Marginal Tax Rate 47.40 16% 18% 20% 22% 24% 26% 28% 33.00% 47.67 48.06 48.47 48.88 49.29 49.71 50.14 33.50% 47.19 47.58 47.98 48.38 48.79 49.20 49.62 34.00% 46.71 47.10 47.49 47.89 48.29 48.69 49.10 SGA Growth 34.50% 46.25 46.63 47.01 47.40 47.79 48.19 48.60 (2020) 35.00% 45.78 46.16 46.54 46.92 47.31 47.70 48.10 35.50% 45.33 45.70 46.07 46.45 46.83 47.22 47.61 36.00% 44.88 45.24 45.61 45.98 46.36 46.74 47.12

Pre-Tax Cost of Debt 47.40 3.7% 3.8% 3.9% 4.0% 4.1% 4.2% 4.3% 10.01% 50.01 49.60 49.20 48.80 48.40 48.01 47.62 10.51% 49.52 49.12 48.72 48.32 47.94 47.55 47.17 Research and 11.01% 49.04 48.64 48.25 47.86 47.48 47.10 46.72 Development 11.51% 48.56 48.17 47.78 47.40 47.02 46.65 46.28 (2020) 12.01% 48.09 47.70 47.32 46.95 46.57 46.21 45.84 12.51% 47.62 47.24 46.87 46.50 46.13 45.77 45.41 13.01% 47.16 46.79 46.42 46.05 45.69 45.34 44.98