Boston Scientific Reports Robust Q3 Results On Solid Sales, Margin Expansion

Global medical device maker Boston Scientific (NYSE:BSX) reported robust third quarter results, with solid growth across divisions. The company’s largest division – Interventional Cardiology (IC) – reported an impressive 8% year-over-year (y-o-y) growth in sales 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, also continued its growth momentum with 4% sales growth y-o-y on a constant currency basis. Neuromodulation sales were flat y-o-y owing to a difficult comparable period. Other divisions such as Endoscopy, Peripheral Interventions and Urology reported consistent mid to high single-digit growth. The company also reported robust sales growth of 57% 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 7% y-o-y to $1.85 billion. This was higher than the company’s own revenue guidance of $1.79 to $1.84 billion, marking the sixth consecutive quarter of improving sales for Boston Scientific. Net income improved from a loss of $5 million in Q3 2013 to a $43 million profit in Q3 2014 owing to higher sales and lower interest expense. Excluding one-time charges such as restructuring charges, litigation and amortization expenses, net income (non-GAAP) increased about 19% to $273 million in the quarter over the same period last year. Adjusted gross margins expanded by 40 basis points y-o-y and 80 basis points sequentially to 71.1% in Q3 2014, primarily on account of the company’s value improvement programs. Boston Scientific expects to maintain this figure in the 70-71% range for full year 2014.

Going forward, the company expects its operational sales to grow in the 4-6% range, driven by robust growth in 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 slightly ahead of the current market price.

See our full analysis for Boston Scientific

Robust Top Line Growth in Key Businesses

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 for 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 Q3 2014 to $480 million, backed by strong sales growth in Europe and the U.S. Defibrillator sales grew 5% y-o-y to $348 million, driven by growing adoption of new products such as S-ICDs, MINI ICDs and the X4 quad pulse generator. The company aims to register $100 million in S-ICD sales in 2014. On the other hand, global pacemaker sales were flat at $132 million as growing  acceptance of the INGENIO product family in international markets offset weakness in the U.S. Going forward, we expect rising sales of new products 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 an operational sales increase of 8% y-o-y in Q3 2014 due to strong performance from the Promus PREMIER and SYNERGY DES products. DES sales were up 13% in the U.S. and 12% in Europe, which helped global DES sales grow 10% y-o-y. Following the successful launch of PREMIER DES in Japan last quarter, the company said that it witnessed sequential market share gains in this market in the country.

Other Divisions Sustain Healthy Growth Momentum

Boston Scientific’s other divisions have been growing consistently in the last several quarters, which continued in the third quarter as well. Endoscopy, which contributes about 18% of the company’s total sales, grew 7% y-o-y on a constant currency basis on account of strong sales of new products, especially biliary, tissue acquisition and metal stents. Neuromodulation sales were flat because of a difficult comparable period. The company aims to grow faster than the market in this segment and is confident about achieving this goal on account of sustained demand for its Precision Spectra system and encouraging physician feedback for its new CoverEdge 32 contact paddle. Urology sales increased 5% y-o-y to $137 million, attributed to strong performance in key international markets including Europe. Going forward, the company expects these businesses to continue to grow, both domestically and internationally.

Litigation Expenses Rise

Boston Scientific reported that its litigation expenses for the quarter were $139 million, taking its total litigation spending to $945 million for the nine-month period ending September 2014. The company faces several lawsuits, including those brought by the Internal Revenue Service, rival healthcare major Johnson & Johnson (NYSE: JNJ) and by thousands of women who claim to have been hurt by its vaginal mesh implants. Boston Scientific lost its first such case last month when it was ordered to pay $73 million to a woman who had been injured after receiving the company’s vaginal mesh implant, used in the treatment of pelvic organ prolapse. ^[3] The company’s CFO and Vice President, Dan Brennan, stated in the recent earnings call that the Johnson & Johnson trial was scheduled to start on November 20, running through the 25th. We will keep an eye on its developments.

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1. Press Release, Boston Scientific, Oct 22 2014 [↩]
2. Boston Scientific Corporation’s CEO Discusses Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Oct 22 2014 [↩]
3. Boston Scientific ordered to pay $73M in vaginal mesh suit, Boston Business Journal, Sept 10 2014 [↩]