After declining following weak earnings, Boston Scientific‘s (NYSE:BSX) stock has risen nearly 10% in the past month to converge with our $6 price estimate following troubles for St. Jude Medical (NYSE:STJ), one of its biggest competitors in the Cardiac Rhythm Management (CRDM) market. (Read Boston Scientific Could Benefit From St. Jude Medical’s Troubles) With the stock price approaching our price estimate, we take a look at Boston Scientific’s business model and see what factors could trigger an upside to our current price estimate. One area in particular where the medical device maker can increase value is if it can limit declines in its market share in Cardiac Rhythm Management and Interventional Cardiology. This could bring about an additional 20% upside to our current price estimate.
See our complete analysis of Boston Scientific
20% Upside Scenario | $7 Trefis Price Estimate
1. Lower Decline in Market Share in Cardiac Rhythm Management (+10%):
Cardiac Rhythm Management equipment helps in the treatment of abnormal heart conditions by the use of pacemakers and implantable cardioverter defibrillators (ICDs). This division is the second biggest revenue and value source for Boston Scientific, with 2011 sales of $2.1 billion. Boston Scientific’s share of the Cardiac Rhythm Management market declined from 25% in 2008 to around 13% in 2011, primarily due to significant competition and lost share related to investigations by the U.S. Department of Justice. 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 investigations as well as intense competition, offset by growth from launch of new products.
However, recent troubles for competitor St. Jude Medical makes the situation more favorable for Boston Scientific. The FDA has raised fresh concerns about St. Jude’s defibrillator leads (leads connect an implantable heart defibrillator device to the heart). Boston Scientific, being the third largest manufacturer of leads in the U.S., stands to benefit from the situation. Further, as concerns are being raised about the safety of leads, hospitals could begin to prefer advanced subcutaneous ICDs, which do not require a transvenous lead to connect the device to the heart. Boston Scientific last year acquired Cameron Health, which builds these next-generation subcutaneous ICDs. Further, the product already has been approved by the FDA. If the company manages to capitalize on the situation, it could limit the decline in market share to 10% by the end of the Trefis forecast period, which would represent a 10% upside to the Trefis price estimate.
2. Lower Decline in Market Share in Interventional Cardiology (+10%):
Interventional cardiology involves the use of catheters to remove clogging from arteries and helps in restoring blood flow throughout the body. Boston Scientific enjoys a market leadership position, primarily because of its coronary stent systems, which are small tubes used to treat coronary artery diseases. However 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 measures in the U.S. and Europe. The ongoing decline is evident in its 2012 sales as well (Read Boston Scientific Earnings Disappoint As Sales Decline Steeply). As a result of 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 promise for sales. 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 an upside of nearly 10% to our current price estimate of $6.
Combining the two previous 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.
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