Boston Scientific (NYSE:BSX) is set to announce its Q1 earnings on Thursday, April 25. The medical device maker has been seeing a decline in revenues for the last five quarters, and we expect the declining trend to continue albeit at a slower rate. Key divisions Interventional Cardiology and Cardiac Rhythm Management (CRM) continued to face a challenging market in Q1 even as the business environment is improving and the effect should be visible in the earnings of upcoming quarters.
We expect revenue growth in Endoscopy and Peripheral Interventions businesses to partially offset some of the decline. For the quarter, we expect gross margins to improve following several cost-cutting efforts undertaken by the management during 2012.
Revenue To Decline, Gross Margins Should Improve
On a yearly basis, we expect the company to record a decline in sales in its Interventional Cardiology franchise due to overall weakness in the U.S. drug eluting stent (DES) market amidst pricing pressure. However, the launch of its own updated version of Promus Element stent in mid-2012, post expiration of its contract with Abbott Labs (NYSE:ABT) should lend support to the division. Further, the limited launch of its next generation of stent “SYNERGY” has received good response in Europe.
The CRM business may also witness some weakness due to overall weak demand for implantable cardioverter defibrillators (ICDs) and pacemakers in the U.S. and Europe. However, its “Reliable” brand of leads (that connect ICDs to heart) could continue to exhibit strong growth following troubles for one of its largest competitors St. Jude. (Read Boston Scientific Could Benefit From St. Jude Medical’s Troubles). Further, a limited launch of its next-generation subcutaneous implantable cardioverter defibrillators (ICDs) that don’t require leads has also gained traction. Further, the “WATCHMAN” family of devices, which are implanted in atrial fibrillation (irregular heartbeat) patients have also seen a strong uptake in international markets.
Endoscopy and Peripheral Interventions businesses should offset part of the expected decline in revenues on continuous product launches in the U.S. and international markets. Further, during Q4, Boston Scientific completed the 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 we expect overall revenues from the U.S. and Europe, Middle East and Africa (EMEA) to register a slight decline, emerging markets will fare well and will see their overall revenue contribution to the company growing.
Boston Scientific’s cost cutting efforts such as moving manufacturing to offshore places like Costa Rica and reducing other related manufacturing costs should be fairly visible through an improvement in margins. This is expected to offset pricing pressure that the medical device maker has been facing with many of its products.
However, this will be the first quarter which will include the impact of the new medical device tax. The new tax came into effect beginning 2013 following the Patient Protection and Affordable Care Act, or ObamaCare, and will result in an increase in SG&A costs.
We have a $8 price estimate for Boston Scientific, which is about 10% premium to the current market price.