How Boston Scientific’s Stock Could Reach $7

In the last year, deteriorating market conditions and weak earnings have taken a toll on the Boston Scientific‘s (NYSE:BSX) stock. However the stock has rose nearly 10% this month alone to converge with our $6 price estimate following the broad buying in the healthcare sector and the improving market sentiment overall. With the stock price hovering around our price estimate, we find it prudent to discuss Boston Scientific’s business model and see what factors could trigger an upside to our current price estimate. One area in particular where the company can drive value is if it can limit the decline or maintain market share in the Interventional Cardiology and Cardiac Rhythm Management segments, which could add another 20% to our current price estimate.

See our complete analysis of Boston Scientific

1. Market share in Interventional Cardiology: This represents Boston Scientific’s revenues from its Interventional Cardiology division as a percentage of the total interventional cardiology market. Interventional cardiology involves the use of catheters to remove clogging from arteries and helps in restoring blood flow throughout the body.

2. Market share in Cardiac Rhythm Management: This represents Boston Scientific’s revenues from its Cardiac Rhythm Management division as a percentage of the total Cardiac Rhythm Management market. Cardiac rhythm management equipment helps in the treatment of abnormal heart conditions by the use of pacemakers and implantable cardioverter defibrillators (ICDs).

20% Upside Scenario | $7 Trefis Price Estimate

1. Lower Decline in Market share in Interventional Cardiology  (+10%):

Boston Scientific enjoys a market leadership position primarily because of its self-manufactured coronary stent systems, which are small tubes used to treat coronary artery diseases. But, Boston Scientific’s market share declined from 33% in 2008 to 23% in 2011 as revenues declined due to significant competition while the overall market size increased. Further, the company is facing pricing pressure following healthcare reforms and austerity drives across the globe. As a result of pricing pressure and intense competition as well as some issues related to stent performance, we expect the company’s market share to decline to below 10% by the end of our forecast period.

However, the recent launch of Promus Element, an improved version of the drug eluting stent (DES) technology, has shown some promises. Further, the exit of Johnson & Johnson from the DES market could help Boston Scientific protect its market share. As the segment is the largest revenue contributor and constitutes more than 25% of our price estimate, even a small out-performance with respect to our expectations will have a huge impact on the company’s valuation. If the company is successful in improving its market presence and limits the decline in market share to 15% by the end of the Trefis forecast period, this could translate into a share price of $6.50, an upside of nearly 10% to our current price estimate of $6.

2. Lower Decline in Market share in Cardiac Rhythm Management (+10%):

This division is the second biggest revenue and value source for Boston Scientific, with 2011 sales of $2.1 billion. Boston Scientific’s Market Share in Cardiac Rhythm Management declined from 25.4% in 2008 to around 12.7% primarily due to significant competition and lost share related to investigations by the U.S. Department of Justice. In 2011, Boston Scientific was sued by the U.S. Department of Justice as its subsidiary Guidant was found to be selling defective implantable cardioverter-defibrillators (ICDs). This has had a negative impact on the company’s brand image and it is losing market share faster due to shrinking demand for its defibrillators. We forecast the company’s market share declining from above 12% currently to about 7% by the end of our forecast period as a result of potential issues related to the aforementioned lawsuit as well as intense competition.

However, the acquisition of Cameron Health in 2011 and the launch of several improved products could counteract the aforementioned issues. The innovation and launch of new products are keys for medical devices company to survive. Cameron Health builds next generation implantable cardioverter-defibrillators (ICDs) called Subcutaneous ICDs. Its products have an advantage over other ICDs as they do not require a transvenous lead to connect the device to the heart. These products have FDA approval, and to the extent that they are effective could help the company fend-off its market share. If this could offset most of the pressure the company is facing for its core products and the decline in market share is limited to 10% by the end of the Trefis forecast period, this will represent a 10% upside to the Trefis price estimate.

Combining the both scenarios, the 10% upside from the lower decline in market share in Interventional Cardiology division and the 10% upside from the lower decline in market share in Cardiac Rhythm Management division, we arrive at 20% upside or a price estimate of more than $7 for Boston Scientific.

Submit a Post at Trefis Powered by Data and Interactive Charts| Understand What Drives a Stock at Trefis