Boston Scientific Beats Expectations On Strong Growth In CRM And Endoscopy

Boston Scientific (NYSE:BSX) reported robust Q4 results, beating market expectations with all of its divisions contributing to the turnaround. During the quarter, the Cardiac Rhythm Management (CRM) division, contributing about 25% to the company’s top line, reported 3% sales growth year-over-year (y-o-y) on a constant currency basis. On the other hand, the largest division – Interventional Cardiology (IC) – continued to stabilize with a low single digit decline, in line with its last quarter results. Overall operational sales, excluding the divested Vascular business, increased 5% y-o-y to $1.838 billion. This surpassed the high end of the company’s own revenue guidance of $1.83 billion, marking the third consecutive quarter of improving sales for Boston Scientific. Gross margins also improved by 80 basis points to 69.8% in Q4 2013 as compared to the same quarter last year.

For the full year, the medical device maker’s revenues grew 2% y-o-y to $7.143 billion on a constant currency basis, driven by 7% growth in Endoscopy and 6% growth in Peripheral Interventions. The company gained from increasing acceptance of its new products and expansion in emerging markets. Boston Scientific expects its sales to grow to $7.3-$7.5 billion in 2014, an increase of 3-5% over 2013 on a constant currency basis. ((Boston Scientific Management Discusses Q4 2013 Results – Earnings Call Transcript, SeekingAlpha, February 04, 2014))

We currently have a price estimate of around $13 for Boston Scientific, which is about in line with the current market price.

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Key Businesses Improved As Expected

Interventional Cardiology (IC) and Cardiac Rhythm Management (CRM) are the two 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 at high single-digit or double-digit rates. However, they are stabilizing gradually, as macroeconomic headwinds weaken and newly launched products gain acceptance.

Operational sales in the CRM division grew 3% year-over-year in Q4 2013 to $468 million, backed by strong sales growth in the U.S. and Europe, partially offset by weak performance in Asia. Defibrillator sales were driven by growing adoption of new products such as Subcutaneous-Implantable Cardioverter Defibrillators (S-ICD) while pacemaker sales grew on the back of growing  acceptance of the INGENIO product family. Going forward, we expect rising sales of new products such as S-ICDs and the ACUITY™ X4 QUAD Lead as well as expansion in international markets to help Boston Scientific stabilize its declining CRM market share.

In the IC market, the company launched a portfolio of drug-eluting stents (DES), including PROMUS Element, Promus PREMIER and SYNERGY, last year. The IC division reported operational sales decline of 3% y-o-y in Q4 2013 due to weak sales of its drug-eluting stents. DES sales suffered due to increasing competition in Japan, disruptions in Germany and flat growth in the domestic market. This was partially offset by strong sales of its Watchman device (for atrial fibrillation patients) which reported 76% sales growth in international markets. We expect these new products to continue performing well in international markets in the near future. Promus PREMIER received FDA approval in November for sale in the U.S. market. Although its contribution to fourth quarter sales was minimal, we expect Promus PREMIER to further drive IC revenues for the company in the next few years, and help stem the decline in Boston Scientific’s IC market share. ((Boston Scientific’s Watchman Wins FDA Panel’s Backing, Bloomberg, Dec 13 2013))

Other Divisions Sustain Healthy Growth Momentum

Boston Scientific’s other divisions have been growing at a rapid pace in the last several quarters, which continued in the fourth quarter as well. Endoscopy, which contributes slightly less than 20% to the company’s total sales, grew 8% y-o-y on constant currency basis. Neuromodulation sales grew 33% on account of strong domestic as well as international sales, especially of its Precision Spectra system. Urology sales increased 5%, attributed to strong performance in Europe and Latin America. Going forward, the company expects these businesses to continue to grow, both domestically and internationally. ^[1]

On the cost cutting front, Boston Scientific continued to implement its “Plant Network Optimization” strategy to improve margins and operational efficiency. However, adjusted SG&A expenses increased to 38.3% of sales in Q4 2013 as compared to 34.6% of sales in the same quarter last year. This can be attributed to increased costs related to emerging market expansion and strengthening core businesses. SG&A expenses increased to 36.8% of sales for the full year 2013 as compared to 34.6% in 2012. The company expects this to remain in 36.5%-37.5% range for 2014 as it invests in strategic businesses in emerging markets and Europe. ^[1]

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1. Boston Scientific Management Discusses Q4 2013 Results – Earnings Call Transcript, SeekingAlpha, February 04, 2014 [↩] [↩]