Boston Scientific (NYSE:BSX) is launching two major products in international markets including Europe and parts of Asia: Promus Element, a drug-eluting stent (DES), and an updated implantable defibrillator lead called Reliance. In addition, the company is launching a new balloon dilatation catheter, Emerge, in the U.S. These moves are part of the company’s efforts to revive two of its biggest divisions Interventional Cardiology and Cardiac Rhythm Management (CRM). Deteriorating market conditions and weak earnings took a toll on the company’ stock last year.
However, its share price has expanded by nearly 10% this month alone to converge with our $6 price estimate following the broader rally in the healthcare sector and improving market sentiment overall. We recently discussed the company’s business model (read here) to see what factors could lead to upside to the Trefis price estimate.
The medical devices market is highly competitive and consumers mainly care about technological innovation and convenience of use, among other factors. Boston Scientific enjoys market leadership in interventional cardiology, primarily because of its self-manufactured coronary stent systems, which are small tubes used to treat coronary artery diseases.
But, its 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 globally. As a result of pricing pressure and intense competition as well as issues related to stent performance, we expect Boston Scientific’s market share to decline to below 10% by the end of our forecast period.
In order to capture market share, medical devices companies have been rushing to launch new and innovative products. A few days ago, Abbott Labs announced the launch of the world’s first drug eluting bioresorbable vascular scaffold (DEVS), Absorb (Read Abbott’s Vascular Franchise Sees New Products Launches).
Given the dwindling sales in two of its biggest divisions, Boston Scientific doesn’t want to be left behind in this rush. Promus Element, an improved version of the DES technology, has shown promise in the U.S. market. By extending it to other markets, the company could limit the expected decline in its market share. Also, the exit of JNJ from the DES market should help the company.
Cardiac Rhythm Management
Defibrillation leads (insulated wires that connect an implantable cardioverter-defibrillator (ICD) to the heart) are not as big a revenue generator as implantable cardioverter defibrillators. But, with the continuous launch of next generation products in cardiac rhythm management, the company can overcome the recent setbacks. 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 ICDs. This has had a negative impact on the company’s brand image and it has been 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.
The company recently announced the acquisition of BridgePoint Medical (Read Boston Scientific Acquires BridgePoint Medical To Bolster Interventional Cardiology Business), which we believe will strengthen and expand the company’s interventional cardiology business. Both segments are the largest revenue contributors and constitute more than 45% of our price estimate. Therefore, even a small out-performance with respect to our expectations will have a huge impact on the company’s valuation.