This has been a great year for Boston Scientific‘s (NYSE:BSX) so far with the stock surging nearly 70% since the beginning of 2013. An improving business outlook (Read Boston Scientific’s Earnings Show Improving Outlook), encouraging follow-up clinical data for Watchman devices (Read New Data On Boston Scientific’s Atrial Fibrillation ‘Watchman’ Device Could Lift Outlook) and a huge response to the limited launch of its next-generation subcutaneous-implantable cardioverter defibrillator (S-ICD) are a couple of reasons behind the huge jump in the stock price. The acquisition of Vessix Vascular, the developer of renal denervation device to treat high blood pressure, also boosted investor sentiment.
With the stock surpassing our $8 price estimate, we examine our assumptions for Boston Scientific’s key business divisions and see what factors could trigger upside to our current price estimate.
25% Upside Scenario | $10.50 Trefis Price Estimate
1. Lower Decline in Market Share in Cardiac Rhythm Management (+20%):
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 2012 sales of $1.9 billion compared with an estimated market size of $18 billion. Boston Scientific has seen its market share decline from 25% in 2008 to around 11% in 2012 primarily due to significant competition for current products, new launches by competitors and safety issues related to its ICDs. While we expect the medical device maker to continue to lose market share, the rate of decline should slow down going forward. We believe that existing pressure from ICD issues and intense competition will be offset by growth from launch of new products, including next-generation S-ICDs and Watchman devices.
S-ICD do not require a transvenous lead to connect the ICD to the heart. After its limited launch in Q4 2012, the device gained huge traction with demand exceeding supply in the first quarter. Being the only commercially available S-ICD in the market, we expect it to help offset pressure in the segment going forward, even as the same would cannibalize a portion of its own ICD sales (Read Boston Scientific: A Look At The Cardiac Rhythm Management Division). However, the reason we have not incorporated significant revenues from the devices is that S-ICDs have not yet been shown to be safe and effective in a diverse patient population. Since ICDs are critical lifesaving devices, physicians will want to wait for more data before getting more comfortable with the use of S-ICD. Should this not act as a dampener for the device, even a meager 10% more share in the global ICD market, which is expected to reach $6 billion by 2015, could create $600 million in potential revenues for the device maker. 
Watchman is implanted in atrial fibrillation (irregular heartbeat) patients to reduce the risk of stroke. While the device is already approved in many international markets, including Europe, it still remains an investigational product in the huge U.S. market. With the device exhibiting strong efficacy in the recently concluded Protect AF trial, we expect it to receive FDA approval soon. But, in the trial, Watchman’s efficacy was similar to that of the standard blood thinner Warfarin in preventing stroke in atrial fibrillation patients. We expect it to limit the device’s potential because without demonstrating better efficacy, the use of the device might remain limited to patients with high risk of bleeding- a serious side-effect of Warfarin.
However, a month ago, a four-year follow-up data from the PROTECT AF clinical trial showed that Watchman demonstrated better efficacy over Warfarin. The new data could help Boston Scientific achieve its peak revenue target of $500 million from the device in the next four years , which will lift Boston Scientific’s market share in the CRM division instead of our current expectation of a decline.
Assuming aforementioned situations come true, ~$1 billion dollar in additional revenues could lift Boston Scientific’s market share to 15% by the end of the Trefis forecast period, which would represent 20% upside to the Trefis price estimate.
2. Higher Market Share in Peripheral Interventions (+10%):
Peripheral products help in the treatment of peripheral vascular diseases, which cause artery blockage or narrowing in the neck, arms, legs and abdomen. These diseases can cause stroke, high blood pressure and kidney problems. In the last couple of years, Boston Scientific has seen its market share decline in the peripheral intervention market as it couldn’t outpace market growth, which has been significant backed by new product launches by competitors. Despite getting some support from the acquisitions of S.I. Therapies and Revascular Therapeutics in 2011, the company’s current market share hovers around 15.5% in the $5 billion peripheral intervention market, well below its 2008 market share of 18%. However, going forward, we expect a near-term increase in market share mainly due to the Vessix Vascular acquisition.
While overall RDN devices sales are still in a nascent stage, the market potential can be gauged from the fact that over 75 million people in the U.S. and about 1.2 billion people worldwide suffer from hypertension (high blood pressure). An estimated 10% of the these patients get no relief from currently available drugs. With the acquisition, Boston Scientific will gain access to Vessix’s RDN system, which has already been approved in Europe. Vessix’s RDN system is a second generation RDN device, which can help Boston Scientific compete with Medtronic’s Symplicity, a first generation RDN device.  Symplicity is estimated to have garnered over $25 million and $50 million in sales in 2011 and 2012, respectively.  We expect Vessix’s RDN system to initially generate sales along similar lines, following its introduction in Europe.
What could hinder Boston Scientific from gaining significant market share is that competition is lining up in Europe. Currently, an estimated 30 companies are developing similar devices and many competitors have already launched their RDNs in these regions. However, last month, in the interim data from the REDUCE-HTN clinical trial, Vessix demonstrated a significant and sustained reduction in blood pressure of the patients treated.  Should the data position the company well to tap the huge market potential and boost its market share to over 20% by the end of the Trefis forecast period, this could translate into upside of nearly 5% to our current price estimate of $8.
Combining the two scenarios, the 20% upside from the lower decline in market share in Cardiac Rhythm Management division and the 5% upside from higher market share in Peripheral Interventions division, we arrive at 25% upside or a price estimate of more than $10.50 for Boston Scientific.Notes:
- Global Implantable Cardioverter Defibrillators Market 2011-2015, Research and Market, April 2012 [↩]
- Boston Scientific atrial fibrillation device proves safe -study, Reuters, March 09 2013 [↩]
- Boston Scientific Corporation – Analyst/Investor Day, Seeking Alpha, Feb 12 2012 [↩]
- Medtronic: ‘Symplicity’ And The Renal Denervation Market, Seeking Alpha, Oct 24 2012 [↩]
- New data demonstrate significant & sustained blood pressure reduction with Boston Vessix Renal Denervation System, PharmaBiz, May 23 2013 [↩]