Boston Scientific: A Review Of The Cardiac Rhythm Management Division And Our Estimates

Boston Scientific’s (NYSE:BSX) stock is riding higher mainly on the back of an improving outlook for its major business division, the Cardiac Rhythm Management (CRM). Products from the CRM division help in the treatment of abnormal heart conditions by the use of pacemakers and implantable cardioverter defibrillators (ICDs). Boston Scientific’s market share has declined from ~25% in 2008 to around 11% in 2012 (2012 sales of $1.9 billion compared with an estimated market size of $18 billion). This was primarily due to significant competition for current products, new launches by competitors and safety issues related to its ICDs.

However, things seem to be falling back on track with Boston Scientific’s several new products doing fairly well (Read Boston Scientific Surprises With Revenue Growth And New Products). Barring some weakness in 2013, we expect the medical device maker to maintain its market share going forward. We believe that existing pressure from intense competition will be offset by growth from launch of new products, including next-generation subcutaneous-ICD (S-ICD) and Watchman devices. For the same reason, while the division is currently the second biggest revenue source for Boston Scientific, we estimate the division to be the largest contributor of our $12 price estimate for Boston Scientific. Below we take a detailed look at the division and our expectations in detail.

See our complete analysis of Boston Scientific

CRM Market: Continued Growth Expected

The Global CRM Market increased from $9 billion in 2008 to around $18 billion in 2012, as emerging markets and increasing heart conditions led to continuous growth in market despite some weakness in the developed nations. Growing populations and other health-related factors in emerging markets have increased the number of people suffering from cardiac diseases in these markets. This coupled with increasing wealth and disposable income have allowed more consumers in these markets to afford medical devices and we expect this trend to continue. Further, innovation of products will also drive market growth.

Estimating that several innovative products are going to be launched worldwide, we expect an increase in global revenues as a result of rise in demand for better and improved products. Procedures in key markets like U.S. and Europe are also expected to pick up from the next year onwards. Going forward, we expect the market to keep increasing at a healthy pace, eventually exceeding $25 billion by the end of the Trefis forecast period.  The market is highly competitive and consumers mainly care about technological innovation and convenience of use, among other factors. A number of players including Boston Scientific and Medtronic are vying for higher market share.

New Products To Drive Growth For Boston Scientific

In 2011, Boston Scientific was sued by the U.S. Department of Justice because 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 and its market share as evident from shrinking demand for its defibrillators. Growing competition also weighed on the market share in the last couple of years. However, Boston Scientific has been investing in new products, which should begin to pay off going forward.

The company acquired Cameron Health in 2011 and received possession of a next generation of ICD (known as S-ICD) that does not require a transvenous lead to connect the ICD to the heart. While its conventional ICDs face some weakness in the market, the limited launch of its next-generation subcutaneous-ICDs (S-ICD) is seeing robust demand. Since concerns are being raised about the safety of leads, hospitals are expected to prefer advanced S-ICDs, once fully launched. While the sales of S-ICD will likely cannibalize some sales of Boston Scientific’s own conventional ICDs, the fact that it is the only commercially available S-ICD in the market so far should help it gain market share from competitors.

During the latest earnings, the company said that it will ramp-up supply of S-ICDs by the third quarter. We expect the product to be fully rolled out by early next year. Once widely launched, we expect it to offset pressure in the segment going forward. The global ICD market is expected to reach $6 billion by 2015  and even a meager 10% more share could create $600 million in potential revenues for the device maker. ^[1] However, what may limit the potential for now 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 would want to wait for more data before getting more comfortable with the use of S-ICD.

The second most promising product in Boston Scientific’s CRM portfolio is Watchman, which is implanted in atrial fibrillation (irregular heartbeat) patients to reduce the risk of strokes. The device is already approved in many international markets including Europe and has seen a huge uptake with implants growing over 50% on a yearly basis. However, it still remains an investigational product in the huge U.S. market where atrial fibrillation affects almost 3 million people. Boston Scientific has earlier estimated the overall market for the device to reach $500 million in the next five years.

The company has already submitted the results of a detailed clinical trial called “Prevail”. During the trial, Watchman devices demonstrated better safety results than what the earlier trial had suggested. The device posted a significant drop in serious complications (build-up of fluid around the heart and stroke) rate compared with the previous “Protect AF” trial. A higher rate of complications was the major reason for reluctance of the FDA.  When approved in the U.S. (expected by the second quarter of 2014), we expect it to replicate its international performance. It will be the only device of its kind in the U.S. for the next couple of years, and therefore will have the first mover advantage in a potentially large market.

The recent positive outcome in the four-year follow-up data from the “PROTECT AF” clinical trial will also play in favor of the device. In this new data, Watchman exhibited better efficacy over Warfarin in preventing death and strokes in atrial fibrillation patients. (Read New Data On Boston Scientific’s Atrial Fibrillation ‘Watchman’ Device Could Lift Outlook). Warfarin is a common treatment for atrial fibrillation patients. Without any significant efficacy over Warfarin, the use of the device might have remained limited to patients with high risk of bleeding, a serious side-effect of Warfarin.

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1. Global Implantable Cardioverter Defibrillators Market 2011-2015, Research and Market, April 2012 [↩]