Boston Scientific (NYSE:BSX) announced its Q4 2012 earnings on Tuesday, where it reported a slight decline in revenues. The medical device maker clocked $1.8 billion in sales in Q4, a decline of 1% (on a constant currency basis) from last year.  Declines in Interventional Cardiology and Cardiac Rhythm Management (CRM) businesses were offset by the growth registered within Endoscopy and Peripheral Interventions franchises. An improvement in gross margins, however, lifted the gross profit. The most significant takeaway from the earnings was that overall business environment seems to be improving for the medical device maker.  The company also announced another round of lay-offs to fend-off impact of new medical device tax applicable from 2013.
We have revised our price estimate for Boston Scientific to $8 from $6, which is about 10% premium to the current market price. A better business outlook, an improvement in gross margins, an announcement of new job cuts and lower taxes all have resulted into higher price estimate.
Revenues Decline, But Key Businesses Stabilizing With New Products Driving Growth
While sales from Interventional Cardiology franchise declined 10% on a year-over-year basis due to overall weakness in the U.S. drug eluting stent (DES) market amidst pricing pressure, the pace seems to getting slower as the launch of its own version of Promus Element stent during 2012 lent support. Positive growth from international market also came to the rescue of the device maker. While near term hiccups will continue, the demand in the U.S. market is stabilizing with international markets continuing to grow. Further, limited launch of its next generation of stent “SYNERGY” has received good response in Europe even as Evolve-II trial is in progress in the U.S. to justify the efficacy. 
Further, the medical device maker completed acquisition of BridgePoint Medical during Q4 (Read Boston Scientific Acquires BridgePoint Medical To Bolster Interventional Cardiology Business). BridgePoint Medical makes a proprietary catheter-based system to treat coronary chronic total occlusion (CTO), an obstruction of a coronary artery. The product has both the FDA and European CE approvals and is currently the only crossing and re-entry system cleared in the U.S. for use in coronary CTOs. All these factors should help Boston Scientific fend-off its market share in the segment.
The CRM business, which includes products like implantable cardioverter defibrillators (ICDs) and pacemakers, witnessed an expected decline in revenues due to weak demand for its ICDs. However, growth in its “Reliable” brand of leads (that connect ICDs to heart), following fresh troubles for one of its largest competitors St. Jude, comes as a positive. Lead-to-port ratio, which measures the number of leads sold relative to the number of ICDs or ports, increased during the period.  A limited launch of its next-generation subcutaneous-ICD (S-ICD), that don’t require leads, has also gained traction. And, the fact that it is the only commercially available S-ICD in the market, should help it offset pressure the company has been facing.
Weakness in pacemakers business was slightly offset by the launch of an upgraded platform of “INGENIO” line of pacemakers and a relatively stable pricing.  Further, the “WATCHMAN” family of devices, which are implanted in atrial fibrillation (irregular heartbeat) patients, have also seen strong uptake in international markets with implants growing over 65% on a year-over-year basis.  The medical device maker is also planning to approach FDA to get the approval in the near future. 
And, owing to these factors, we have increased our market share projections for these businesses from our earlier estimate.
Other Businesses Doing Pretty Well
High growth in endoscopy and peripheral interventions businesses were not surprising. Both segments have seen several product launches in 2012.  However, during Q4, Boston Scientific completed acquisition of Vessix Vascular, a developer of a radiotherapy-based system to treat high blood pressure (Read Boston Scientific Acquires Vessix Vascular To Bolster Peripheral Intervention Business), which should help it improve its market share going forward.
While sales from the U.S. and Europe, Middle East and Africa (EMEA) declined 3%, revenues from BRICs grew by 35% on a constant currency basis justifying the importance of the medical device maker’s focus on these markets.  We expect such rapid growth in emerging markets to continue in short term and with immense focus on these markets, Boston Scientific stands to benefit immensely.
Cost Cutting Efforts Creating Value For Shareholders
The launch of its own Promus Element Stent and moving manufacturing to offshore places have lowered the cost of goods sold substantially. Gross margins increased to 68% from 64% in the same period last year.  While we expect pricing challenges to continue to weigh on margins, this should be offset by aforementioned cost cutting efforts in near term. We have accordingly increased our gross margins expectations going forward.
Further, moving manufacturing operations to other countries have also led to a decline in effective tax rates and this is expected to continue to keep tax rates low in near term. Beginning 2013, new medical device taxes have come into effect following Patient Protection and Affordable Care Act, or ObamaCare, and will increase SG&A costs, recent announcement of cutting 1,000 jobs should lower the impact of new taxes.Notes: