Boston Scientific (NYSE:BSX) last week announced its quarterly earnings for Q3 2012, in which it reported a steeper than expected decline in sales. The company generated $1.73 billion in sales, a decline of 5% (on a constant currency basis) from last year as it continues to face challenges mainly in interventional cardiology and cardiac rhythm management (CRM) businesses. The strengthening of the U.S. dollar also contributed to 2% of the sales decline while gross margins improved following the cost-cutting efforts. However, Boston Scientific posted a loss due to a one-time $0.81 billion goodwill impairment relating to its U.S. CRM reporting unit. 
The company also lowered its Q4 2012 earnings outlook, which usually is a seasonally good quarter. The stock slipped more than 5% following weak earnings and outlook revision.
We are in process of updating our $6 price estimate for Boston Scientific, which is about 10% ahead of the market price.
Weak Performance Across Divisions
The company’s interventional cardiology franchise fared worse than our initial expectations as it continues to lose market share due to lower demand for stents and growing competition. Revenues from this business declined 17% before including the currency impact. The CRM business is also losing market share faster due to shrinking demand for its defibrillators. The slowdown in these divisions has contributed largely toward the sales decline as these segments together account for more than 55% of total sales, contributing more than 50% to the company’s value, according to our estimates.
Some of the revenue decline was offset by revenue growth in endoscopy and peripheral interventions businesses.
Sales from the U.S. slumped 8% while Europe, Middle East and Africa (EMEA) declined 14% partially because of the depreciation of the Euro relative to the USD. As expected, sales from other countries, including emerging markets, continued to grow by 12%, excluding the 5% unfavorable currency impact. We expect emerging markets will continue to grow at a robust rate and see their overall revenue contribution to the company growing.
Significant Improvement in Margins
Boston Scientific’s cost reduction efforts such as moving manufacturing to Costa Rica and reducing other related manufacturing costs were fairly visible through an improvement in margins. Gross margins increased to 68% from 64% in the same period last year. This slightly offset pricing pressure that the company is facing currently with many of its products.
The company continues to face short-term hiccups following the weak outlook for its key businesses, pricing pressures and a strong U.S. dollar. However, we are cautiously optimistic about the company’s long-term growth. The company recently announced several product launches (Read Boston Scientific Beefs Up Its Interventional Cardiology And CRM Businesses) and the acquisition of BridgePoint Medical (Read Boston Scientific Acquires BridgePoint Medical To Bolster Interventional Cardiology Business), which we believe will strengthen and expand its interventional cardiology business.
We will soon release the updated Trefis price estimate for Boston Scientific.Notes:
- Boston Scientific Announces Third Quarter 2012 Results, Boston Scientific Press Release, Oct 18 2012 [↩]