In the last four months, Boston Scientific‘s (NYSE:BSX) stock has seen a strong rally riding on expectations of improving market conditions and recent acquisitions completed by the medical device maker. (Read Boston Scientific Revised To $8 On Acquisitions, New Products & Cost Cutting Efforts) However, with one of the largest competitors, Medtronic (NYSE:MDT), witnessing further pressure in Europe in the month of January (Read Medtronic Earnings Meet Expectations But European Weakness A Concern), we find it prudent to revisit our core business assumptions for Boston Scientific to see what factors could trigger downside to our current price estimate.
One area in particular where the company can lose value is if it fails to limit the declines in its market share in the interventional cardiology and cardiac rhythm management (CRM) segments. In the scenario below, we see 20-25% downside to our current price estimate.
1. Higher Decline in Market Share in Interventional Cardiology (-15%):
While Boston Scientific used to enjoy a dominant position in the interventional cardiology market, it has conceded market share in recent years. Its market share has declined from 33% in 2008 to 19% in 2012, as revenues declined due to significant competition and pricing pressure while the overall market size increased. However, going forward, we foresee a limited decline in its market share on a number of factors. We expect pick up in the U.S. drug eluting stent (DES) market coupled with continued growth in its own version of Promus Element stent to lend support. The limited launch of its next generation stent “SYNERGY” has also 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 its 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 limit the decline in its market share in the segment.
However, as the segment is the largest revenue contributor and constitutes more than 25% of our price estimate even a small under performance with respect to our expectations will have a big impact on the company’s valuation. Should the medical device maker face further pressure in the large European market as is being witnessed by Medtronic, and the U.S. dollar continues to remain strong, it could see its market share declining at a steeper rate to 10% by the end of Trefis forecast period. This could translate to a downside of nearly 15% to our current price estimate to $8.
2. Higher Decline in Market share in Cardiac Rhythm Management (-5-10%):
This division is the second biggest revenue and value source for Boston Scientific with 2012 sales of nearly $2 billion. Boston Scientific’s market share in the CRM market declined from 25% in 2008 to around 11% in 2012, 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 in a very competitive market. However, despite aforementioned issues, we forecast a gradual decline in the company’s market share from around 10% currently to about 9% by the end of our forecast period.
Its “Reliable” brand of leads (that connect ICDs to heart) are seeing strong growth following fresh troubles for one of its largest competitors St. Jude, and 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. The pacemakers business is being helped 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, are also growing rapidly.  The medical device maker is also planning to approach FDA to get the approval in the near future. 
However, should these factors fail to take pressure off the company amidst significant competition, and the market share declines further to 6% by the end of Trefis forecast period, this will represent close to 10% downside to our price estimate.
Combining both scenarios, a near 15% downside from a higher decline in market share in interventional cardiology division and close to 10% downside from a higher decline in market share in cardiac rhythm management division, we arrive at almost 20-25% downside or a price estimate of close to $6 for Boston Scientific.Notes: