Irish passion continues to attract Boston commitment

Boston Scientific has over 4,500 employees in Ireland but fears that the company may be planning to reduce its footprint here are misplaced, according to its CEO who trumpets the ‘stellar’ performance of its Irish operations

JUST 15 MILES west of Boston, the sprawling corporate headquarters of Boston Scientific is located in a quiet part of the world called Natick. The name comes from the language of the Massachusetts, a tribe of Native Americans, and means “place of hills”.

The view from the boardroom in Building C, where interim chief executive Hank Kucheman has his office, is one of rolling hills which are strikingly green and oddly familiar-looking.

Perhaps it is no surprise then that the medical devices giant also feels at home in Galway, where its first Irish operation was established in 1994.

A suave, tanned character, whose career began in the US air force, Kucheman has been with Boston Scientific since 1995. Before taking over as chief executive officer late last year, he was head of the cardiology, rhythm and vascular group, which makes him intimately familiar with the work happening at the company’s three Irish locations in Galway, Cork and Clonmel.

And he is, undoubtedly, a fan.

“What I have always been impressed by through the years is the attitude of the Irish people – their dedication, their passion, their attention to detail and their desire to ‘get-it- right-first-time’ type of mentality,” he says in the Natick board room, on a recent Thursday afternoon.

“Over the years, we’ve brought some of our toughest challenges to Ireland in terms of product initiatives or product introductions, and the people there have been just absolutely stellar. They have knocked it out of the park almost every time,” he adds.

Boston Scientific is one of Ireland’s most significant employers, with more than 4,500 employees. Roughly 2,650 are based in Ballybrit in Galway, where the company has both a manufacturing operation and a high- tech RD centre. It is the company’s biggest manufacturing site globally and it was here that Kucheman first encountered the Irish unease with accepting a compliment.

“They’re so modest and humble,” he laughs, recalling his early confusion. “They almost get embarrassed by the fact that you’re complementing them on the job that they’re doing. In meetings, I’d say ‘Wow, that was very well thought out; that’s a cogent strategy and the way you’re executing that is absolutely outstanding’, or something like that. And they would turn red!”

He notes that the same sort of humility is far from de rigueur in other parts of the world.

The company employs another 20,000 people in locations across the Americas, Europe, Asia, the Middle East and Africa. It generated $7.6 billion in net sales last year from a product line of medical devices that includes pacemakers, stents, pain management systems and other technologies used in cardiology, urology, gastroenterology and various other medical disciplines.

Boston is truly a world player with leading market positions in many of the products it makes. But, like others, the company has suffered a decline in revenue in recent years. Last year’s net sales were down from $7.8 billion in 2010.

“The two largest businesses that we have – drug-eluting stents and the CRM [cardiac rhythm management] business – are under very intense pricing pressures around the world,” says Kucheman, explaining the declining revenue and a 20 per cent drop in Boston’s share price over the past 12 months.

“Wall Street has basically looked at our business and said, ‘Hmm, roughly 70 per cent of our revenue generated comes from these two businesses’,” he says.

Boston’s 2006 acquisition of the medical devices firm Guidant, following a wild bidding war with Johnson Johnson, also prompted a period of investor anguish.

Boston ultimately paid $27.3 billion (close to a multiple of 50 times Guidant’s earnings) for its smaller competitor in a deal that was later described by Fortune magazine as “the second-worst deal ever” and “the biggest MA blunder since AOL/TimeWarner”.

Within months of the acquisition (which included Guidant’s site in Clonmel), the company had issued a recall on thousands of Guidant’s cardiac devices and watched its share price fall off a cliff.

Interestingly, Kucheman says that Clonmel – the smallest of Boston’s Irish operations with 700 employees – “will see increased management and focus”.

“Clonmel is a site where we make our radio cardio devices and defibrillators and the team there has evolved very effectively and is very competent. And I think you’ll find that, in the coming years, we’re going to bring more of our CRM business that way as well,” he says.

He acknowledges though that the overall group is in the middle of “a turnaround” (the company has posted a loss in four of the past five years).

Often the word turnaround – like “rationalisation” or “streamlining” – will send a shiver down the spine of the average employee. For 1,100 people who worked at Boston’s manufacturing plant in Miami, Florida, their worst fears were realised last December. The site was shut down as part of a push to improve the company’s cost structure by $750 million over five years.

Kucheman refers to that particular part of the plan as “plant network optimisation”. The Miami closure constituted a saving of roughly $100 million.

A recent Wall Street Journal analysis found that Boston Scientific has shed a total of 3,000 jobs since 2007 but, for the most part, the company’s Irish operations have been spared the worst of the layoffs.

Two plants in Donegal were closed in 2009 with the loss of 120 jobs while, in 2010, 175 workers lost their jobs in Galway – a devastating blow for those affected, doubtless, but perhaps broadly more palatable when set against the size of the Miami closure.

The second part of the company’s turnaround strategy is about pursuing new growth opportunities through the acquisition of smaller competitors and the introduction of new products (this year alone Boston will see 24 new products hit the market, just in its cardiology business).

The third is China.

“Historically, we have not been focused in Asia-Pac or emerging markets so that’s the third piece of the strategy,” Kucheman says.

“For example, if you just picked drug-eluting stents, the worldwide market share that we have is around 34 per cent – so we’re the number one manufacturer of drug-eluting stents in the world today. In China, our share of the market is more like 4 or 5 per cent,” he adds.

In order to “unlock that potential” in China, Boston Scientific has established a training and research centre in Shanghai, along with a manufacturing plant that it expects will employ close to 1,000 people.

This, according to one employee based in Galway, has everyone “afraid of their lives” that the company will ultimately move more of its manufacturing capability there. After all, surely there’s only so much “efficiency” a company can squeeze out of a country with costs like Ireland?

Kucheman is quick to disagree.

“I wouldn’t just obviously leap to the conclusion that you’ve reached there and I wouldn’t necessarily assume that you could manufacture more cheaply in other parts of the world,” he says.

“Ireland has one of the lowest tax rates in the world today . . . and this is one of the things I admire about your country’s strategy. But when medical device companies or pharma companies or telecommunication companies look to the Ireland opportunity, one of the things that I find very attractive is how your Government thinks about developing the skill sets within your country.”

Kucheman has high praise for Ireland’s RD tax credits, which he says are part of a “smart” government strategy to bring innovation into the State.

“It’s smart because you’re taking your students coming out of college and your existing engineers and you’re actually strengthening the skill sets and competencies of a highly-skilled labour force that will be very attractive to industry from other parts of the world,” he says, adding (emphatically): “That is smart, so I don’t see where our commitment to Ireland is going to suffer or diminish because of what we’re doing in China.”

Kucheman says there is “no one single thing” that would prompt Boston Scientific to abandon its Irish operations – not a change in the corporate tax rate or an Irish exit from the euro (the company has, he says, set aside reserves for bad debt based on the continuing euro crisis which are already “baked into” the company’s financials).

Rather, he says it is a combination of factors that keeps the company in Ireland.

“There’s no one single thing or factor that says ‘Okay, just because this happens, we’re gonna decide to do business elsewhere’,” he says. “But obviously the combination of the corporate tax rate plus the RD grants that industry gets for bringing innovation into your country are very important factors. And so they are, and will remain, important to companies like Boston Scientific.”

The medical device giant still has some way to go before it can be said to have turned itself around, however. Ironically, given the threat perceived by some, it would seem that its Irish staff should be rooting for the success of the company’s initiatives in China and other emerging markets as they constitute the greatest potential for revenue growth in the coming years.

“What we, as well as our investors, are looking for is to stop the year-over-year revenue decline in [our core] businesses,” Kucheman says. “Then we have invested in several other growth opportunities. We believe very strongly that once those growth opportunities become commercialised, that’ll begin to help impact the top line in a very positive way.

“That strategy has been in place for a couple of years and . . . I’m pleased with where we are today, in terms of that journey, but we have a lot more wood to chop in order to get where we need to be,” he acknowledges.

On November 1st, Kucheman will hand the reins to new incoming chief executive Mike Mahoney – a medical devices veteran who left Johnson Johnson last year to join Boston Scientific.

Kucheman says Mahoney is equally committed to the group’s Irish operations.

“First up, Mike’s Irish. Second, he was with me when we visited the three sites earlier this year . . . he was exceptionally impressed with the people, with the sites and I don’t think you’ll find that, just because our company is going to transition to a new CEO, that you’ll find our commitment to Ireland is going to diminish because of that,” he says.

“It’s the people who define a company and the passion and the commitment and the focus that I’ve seen on the part of the Irish I don’t see often around the world – and I’m including the US, quite candidly.”

In the meantime, Kucheman has a rallying cry for the troops at Boston Scientific’s three Irish locations: “Keep doing what you’re doing, keep doing it the way you’re doing it and you will continue to succeed in ways you can’t even imagine today.”