Moody's Investors Service has upgraded the Boston Scientific’s corporate credit rating to an investment grade rating, Baa3, with a stable outlook. Fitch Ratings and Standard & Poor's currently rate the company's corporate credit as investment grade at BBB-, with a stable outlook.

"We are pleased to achieve an investment grade rating from all three major credit rating agencies, recognizing the strength of our balance sheet, strong cash flow, recent drug-eluting stent and cardiac rhythm management product launches, as well as other tangible signs of the progress we are making in driving value with our POWER strategy," says Jeff Capello, executive vice president and chief financial officer. "We remain committed to a strong capital structure and improved profitability, while retaining the capacity to fund investments in our Priority Growth Initiatives and other programs to increase shareholder value."

According to Moody's, its rating action is based on its belief that the company will be able to maintain sufficient financial flexibility despite weak sales growth and competitive pressures in its core drug-eluting stent (DES) and cardiac rhythm management markets (CRM).

"Boston Scientific's commitment to lower leverage and cost-cutting initiatives should provide it with sufficient cushion to withstand ongoing pressures in its core markets," says Diana Lee, a Moody's senior credit officer. "Furthermore, patent litigation risk continues to wind down, as recent developments appear to weigh in Boston Scientific's favor."

In a release, Moody’s noted that the Baa3 rating considers its size, diversification and good cash flow, but also incorporates its declining sales trends, strong competition in its core maturing markets, and outstanding litigation. The rating also incorporates Moody's belief that Boston Scientific will need to rely more on investing in new technologies in order to remain competitive with peers that are farther along in commercializing or developing certain key cardiac devices.

“In addition to receiving earlier than expected US approval for its PROMUS Element Plus drug-eluting stent (DES), the company recently introduced new CRT and ICD platforms. While fourth quarter results showed some slippage in market share for both DES and CRM, Moody's expects that once fully launched, these new products will help Boston reverse share losses.” Moody’s also said that the appointment of Mike Mahoney--with prior experience in the medical device space--to president and later this year, CEO, is viewed favorably “although there remains some uncertainty associated with the transition.”

Moody’s also acknowledged that the competition in both the DES and CRM markets “continues to ratchet-up as all players are in the midst of introducing new products. Recent safety concerns involving stent deformation and a competitor's CRM lead are also factors that could influence the uptake of new products. All medical device companies will increasingly face the challenges of physicians having less influence in purchasing decisions while hospitals and payers demand demonstrated cost effectiveness,” the release noted.

The stable outlook reflects Moody's expectation that newly introduced DES and CRM products will help reverse recent market share losses and that, “even as a new CEO transitions later this year, the company will not engage in large debt financed acquisitions or buyback initiatives.” The outlook also reflects Moody's belief that free cash flow to debt will be sustained around 20% and debt/EBITDA will be sustained at levels well below 3.0 times.

Moody’s also suggested that if Boston Scientific can improve market share in existing mature businesses while becoming competitive in newer technologies and continue to internally fund acquisitions and buybacks, the ratings could be upgraded. Debt/EBITDA and free cash flow to debt sustained around 2.0 times and around 25%, respectively, could help support an upgrade. If the company sees further deterioration in sales and market share due to competitive or regulatory or economic pressures or if it engages in large debt financed acquisitions, buybacks or litigation payouts, ratings could be downgraded. If debt/EBITDA and free cash flow to debt are expected to be sustained above 3.0 times and below 15%, respectively, the ratings could be downgraded.

The principal methodology used in rating Boston Scientific was the Global Medical Products & Device Industry Methodology published in October 2009.