Boston Scientific Earnings Preview: Turnaround Of Key Businesses Likely To Boost Sales

Boston Scientific‘s (NYSE:BSX) revenues have not seen any major positive growth over the past few years due to increasing competition and pricing pressure. However, in Q3 2013, sales of two of the company’s largest divisions, Cardiac Rhythm Management (CRM) and Interventional Cardiology (IC), stabilized after an extended period of decline. The company’s gross margin improved to 71% from 68% in Q3 2012, as its cost-cutting measures under the “Plant Network Optimization” strategy bore fruit. However, the medical device maker’s global revenues declined sequentially and remained flat year-over-year (y-o-y).

As Boston Scientific comes out with its Q4 2013 earnings on February 4, we expect its global sales to increase as demand for its new products such as S-ICD (Subcutaneous-Implantable Cardioverter Defibrillators), Promus PREMIER stent and the anti-stroke Watchman device rises. Accordingly, the company should be able to meet its guidance of $1.78 billion – $1.83 billion for fourth quarter sales. We also expect its gross margin to continue improving with the effective execution of its strategic plan.

We currently have a price estimate of $13 for Boston Scientific, which is slightly below the current market price.

See our full analysis for Boston Scientific

Turnaround In Key Businesses Likely

Interventional Cardiology (IC) and Cardiac Rhythm Management (CRM) are two of the biggest divisions for Boston Scientific, contributing over 50% to the company’s value, according to our estimates. While the IC division derives its revenues mainly from coronary stents and catheters, CRM’s primary products are pacemakers and defibrillators.

During the past few years, sales of both of these divisions have declined rapidly (high single digit or double digit rates). The IC division was primarily impacted by a decrease in the number of procedures performed, partially caused by weakness in the U.S. economy and austerity measures in Europe. On the other hand, CRM’s sales fell due to fierce competition and safety issues related to some its implantable cardioverter defibrillators (ICD).

However, both of these divisions are stabilizing gradually, as macroeconomic headwinds weaken and newly launched products gain acceptance. In Q3 2013, CRM logged growth for the first time in several quarters, with sales rising by 1% on constant currency basis. Although IC’s sales continued to fall, the rate of decline (2%) was slower than what the division had seen in the preceding quarters. We expect the revival of both of these businesses to continue in the fourth quarter, which could help Boston Scientific stabilize its declining IC market share.

New Products To Continue Driving Sales Growth

For the past few years, Boston Scientific has been extremely focused on remodeling its product portfolio, demonstrated by the fact that the company has introduced about 11 new products in the last two years. ^[1] For the IC market, the company launched an innovative portfolio of drug-eluting stents including PROMUS Element, Promus PREMIER and SYNERGY. These stents, when placed in a diseased and constricted artery, release a drug to prevent the artery from getting blocked. ^[2] SYNERGY and PROMUS are currently being sold in emerging markets as well as Europe, where they are doing well. ^[3] In fact, moderation in the rate of decline in the IC division’s sales last quarter were attributed to growing sales of these new products. We expect them to continue performing well in international markets in the near future. For sale in the U.S., Promus PREMIER received its FDA approval in November last year. We expect the FDA approval to further drive IC revenues for the company in the next few years and stem the decline in Boston Scientific’s IC market share. ^[4] However, its impact on the fourth quarter results is likely to be marginal.

For the CRM market, Boston Scientific launched several promising products, including the Subcutaneous-Implantable Cardioverter Defibrillator (S-ICD), ACUITY™ X4 QUAD Lead and the Watchman device for atrial fibrillation patients. Demand for S-ICD remains high, and the company is in the process of easing supply constraints in order to meet demand. The S-ICD platform was awarded the prestigious Prix Galien award for Best Medical Technology last year, highlighting its potential in the market. Boston Scientific estimates that this market will grow to over $750 million worldwide by 2020, and the device has no major competitors at present. ^[3] ((Boston Scientific Corporation at JPMorgan Healthcare Conference, Boston Scientific, Jan 14 2014))

Watchman devices are doing well too, as international sales and implants increased by 45% last quarter y-o-y. The stroke preventing device received the backing of FDA advisers in December last year and is expected to receive U.S. regulatory approval by Q1 2014. ^[5] This Product also does not have any major rivals at present, and Boston Scientific estimates the overall market for this device will reach $500 million by 2020. Going forward, we expect the market share of the CRM division to begin to stabilize as these products continue to grow and are launched in more countries.

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1. Boston Scientific’s CEO Presents at Morgan Stanley Global Healthcare Conference, SeekingAlpha, September 9, 2013 [↩]
2. What are Drug-Eluting Stents?, NewsMedical [↩]
3. Boston Scientific Management Discusses Q3 2013 Results – Earnings Call Transcript, SeekingAlpha, October 24, 2013 [↩] [↩]
4. Press Release, Boston Scientific, Nov 25 2013 [↩]
5. Boston Scientific’s Watchman Wins FDA Panel’s Backing, Bloomberg, Dec 13 2013 [↩]