Boston Scientific (NYSE:BSX) announced its Q1 2013 earnings on April 25, and it reported a 4% (on a constant currency basis) decline in revenues to $1.76 billion.  Weakness in the key Interventional Cardiology and Cardiac Rhythm Management (CRM) businesses continued to weigh on growth while the Endoscopy and Peripheral Interventions franchises exhibited strong growth.
Cost cutting efforts undertaken by the company were visible through a slight improvement in gross margins and adjusted operating margins despite pricing pressures. Another positive is that management expects the overall business environment to improve during the rest of the year, and the company expects to return to growth by next year.  Below we take a detailed look at the earnings and growth drivers going forward.
Key Businesses Witness Decline But Outlook Is Improving
Sales from the Interventional Cardiology franchise declined 16% on a year-over-year basis due to overall weakness in the U.S. drug eluting stent (DES) market amidst pricing pressure. Growth from international markets turned negative in the quarter due to pricing declines and significant depreciation in the yen and euro. Emerging markets including China and India, on the other hand, showed 60% growth. While near term weak demand will continue to be weak, stent demand in the U.S. market is stabilizing. As economic growth picks up, it is likely that people who delayed medical procedures on account of financial hardship will drive increases in total procedures.
Further, the continued launch of new and improved products and recent acquisitions should also help the medical device maker in upcoming quarters. The limited launch of its next generation of stent “Synergy” has received a good response in Europe while the Evolve-II trial is in progress in the U.S. to justify its efficacy.  Further, the BridgePoint acquisition in Q4 2012 brought a catheter-based system to treat coronary chronic total occlusion (or CTO, an obstruction of a coronary artery). (Read Boston Scientific Acquires BridgePoint Medical To Bolster Interventional Cardiology Business) The product has both FDA and European CE approval and is currently the only crossing and re-entry system cleared in the U.S. for use in coronary CTOs.
The CRM business, which includes products like implantable cardioverter defibrillators (ICDs) and pacemakers, grappled with weak demand for ICDs. However, Boston Scientific’s “Reliable” brand of leads (that connect ICDs to heart), continued to see positive growth following troubles for one of its largest competitors, St. Jude. Lead-to-port ratio, which measures the number of leads sold relative to the number of ICDs or ports, increased for the fifth consecutive quarter.  Additionally much progress has been made by its next-generation subcutaneous-ICDs (S-ICD), which do not require leads. After its limited launch in Q4 2012, demand exceeded supply in the first quarter.  Being the only commercially available S-ICD in the market, it should help offset pressure in the segment going forward (read Boston Scientific: A Look At The Cardiac Rhythm Management Division).
Weakness in the pacemaker business was slightly offset by a pick up in sales of an upgraded platform of the “Ingenio” line of pacemakers.  Further, the “Watchman” family of devices, which are implanted in atrial fibrillation (irregular heartbeat) patients, are also seeing a strong uptake in international markets. Watchman exhibited 30% growth on a year-over-year basis.  The medical device maker is also working on final statistical analysis of the PREVAIL data to get FDA approval. 
Other Businesses Showing Growth
Continued growth in the endoscopy and peripheral interventions businesses was not surprising. Both segments have seen several product launches in the last year which have led to revenue growth.  Going forward we expect peripheral intervention to get support from the recent acquisition of Vessix Vascular, which is a developer of a radiotherapy-based system to treat high blood pressure (Read Boston Scientific: A Look At The Peripheral Intervention Business).
While sales from the U.S. and Europe, Middle East and Africa (EMEA) declined, revenues from BRIC grew by a strong 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 the short term, and with its focus on these markets Boston Scientific stands to benefit immensely.
Cost Cutting Efforts Are Being Reflected In Margins
Moving manufacturing offshore has lowered the cost of goods sold for the medical device maker. Despite the appreciation in the U.S. dollar and pricing pressure, gross margins increased slightly to 67% from 66% in the same period last year.  Further, several rounds of job cuts have lowered the impact of new medical device tax as SG&A costs declined, both on an absolute basis and as a percentage of revenues. R&D expenditures also declined, demonstrating the company’s focus on reducing costs to boost profitability. We expect these trends to continue in the near-term.
Moving manufacturing operations to other countries has also led to a decline in effective tax rates, and we expect this to continue to keep tax rates low in the near-term.
We are updating our $8 price estimate for Boston Scientific, which is about 10% premium to the current market price, to reflect earnings.Notes: