Boston Scientific Reports Solid Q2 Results On Balanced Growth Across Divisions

Global medical device maker Boston Scientific (NYSE:BSX) reported a strong set of second quarter results, with robust growth across divisions. The company’s largest division- Interventional Cardiology (IC) – reported low single-digit growth in the quarter, continuing the growth momentum it picked up in Q1 after consistent sales declines last year. The Cardiac Rhythm Management (CRM) division, contributing over 26% of the company’s top line, turned around in the quarter with 5% sales growth year-over-year (y-o-y) on a constant currency basis. Neuromodulation sales growth plummeted from double-digits in the last quarter to low-single digits in Q2 owing to a difficult comparable period. Other divisions such as Endoscopy, Peripheral Interventions and Urology also reported consistent low to mid single-digit growth. The company also reported robust sales growth of 55% y-o-y in Electrophysiology (EP), primarily driven by the acquisition of C.R. Bard’s EP business in November of last year. ^{[1] [2]}

Overall operational sales, excluding the divested Vascular business, increased 5% y-o-y to $1.87 billion. This was towards the higher end of the company’s own revenue guidance of $1.84 to $1.89 billion, marking the fifth consecutive quarter of improving sales for Boston Scientific. Net income fell from $130 million in Q2 2013 to $4 million in Q2 2014 owing to a one-time $167 million litigation expense and slightly higher SG&A (selling, general and administrative expenses) expenses. Excluding the one-time charges, net income (non-GAAP) increased over 15% to $285 million in the quarter. Adjusted gross margins declined by 50 basis points to 70.3% in Q2 2014 as compared to the same period last year. However, excluding the one-time 90 basis points benefit realized by the company in Q2 2013 on account of its Promus profit share agreement, adjusted gross margins improved by 40 basis points compared to the same period last year.

Going forward, the company expects its operational sales to continue growing in the 3-5% range, driven by the turnaround of key businesses and growing acceptance of new products such as S-ICDs (Subcutaneous-Implantable Cardioverter Defibrillators), SYNERGY and Promus PREMIER stents, the anti-stroke Watchman device and the bronchial thermoplasty system Alair.

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

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Key Businesses Drive Sales Growth

Interventional Cardiology (IC) and Cardiac Rhythm Management (CRM) are the two biggest divisions for Boston Scientific, contributing about 55% of 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. Sales of both of these divisions have started picking up after rapid declines in the last few years, as macroeconomic headwinds weaken and newly launched products gain acceptance.

Operational sales in the CRM division grew 4% year-over-year in Q2 2014 to $497 million, backed by strong sales growth in the U.S., Europe as well as Asia. Defibrillator sales grew 3% y-o-y to $355 million, driven by growing adoption of new products such as Subcutaneous-Implantable Cardioverter Defibrillators (S-ICD), MINI ICD and the X4 quad pulse generator. On the other hand, pacemaker sales grew 6% on a constant currency basis to $142 million 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 increase of 1% y-o-y in Q2 2014 due to strong performance of the Promus PREMIER and SYNERGY DES products. In fact, owing to its strong DES performance, Boston Scientific’s share increased by about 150 basis points in the U.S. DES market during the quarter. The company also gained share in the international DES market on account of strong performance in Europe and the successful launch of PREMIER in Japan.

Other Divisions Sustain Healthy Growth Momentum

Boston Scientific’s other divisions have been growing consistently in the last several quarters, which continued in the second quarter as well. Endoscopy, which contributes about 18% of the company’s total sales, grew 4% y-o-y on a constant currency basis. Neuromodulation sales grew 3% on account of strong domestic as well as international sales, especially of its Precision Spectra system. However, the growth rate was impacted due to a difficult comparable quarter. Urology sales increased 7% y-o-y to $133 million, attributed to strong performance in key international markets and a turnaround in the U.S. Going forward, the company expects these businesses to continue to grow, both domestically and internationally.

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1. Press Release, Boston Scientific, July 24 2014 [↩]
2. Boston Scientific Corporation’s CEO Discusses Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, July 24 2014 [↩]