Boston Scientific Reports A Strong Q2’15 With Continuous Growth Across Key Businesses

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Boston Scientific

Medical devices manufacturer Boston Scientific (NYSE:BSX) reported its fourth consecutive quarter of strong (6% or more) growth in operational revenue in Q2 2015. The continued growth momentum has been driven by robust execution in the company’s core businesses, strong new product launches, increased traction from the Structural Heart business, continued international expansion and leverage from prior acquisitions. Backed by the strong diversification of its portfolio, focus on innovation and its ongoing globalization efforts, Boston Scientific aims to drive mid-single digit operational revenue growth and consistent operating margin expansion, which in turn is expected to drive double-digit adjusted EPS growth (excluding the impact of foreign exchange) in 2015.

Despite challenging economic conditions, a competitive environment, and adverse currency headwinds, Boston Scientific managed to beat Wall Street estimates in Q2 2015. The consistent momentum – with several ongoing product launches and the expected closure of the American Medical Systems (AMS) urology portfolio acquisition – is expected to keep the growth momentum alive in subsequent quarters.

Our price estimate of $15 for Boston Scientific is approximately 15% below the current market price. We are in the process of updating our model for the Q2 2015 earnings.

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See our full analysis for Boston Scientific

Q2 2015 Earnings Snapshot

At $1.84 billion, Boston Scientific’s Q2 2015 consolidated revenue (excluding the impact of foreign exchange and the divested Neurovascular business) grew 6% year on year. On an as-reported basis, revenue declined 2% year on year. Excluding an approximate 170 basis point contribution from the Bayer Interventional acquisition, organic revenue growth was 4% in the quarter. The U.S., Europe and Asia regions all grew 6%, while emerging markets grew 12% led by a 21% revenue growth in China. The operating margin of 22.1% grew 230 basis points compared to Q2 2014. Adjusted earnings per share (EPS) came in at $0.22,  compared to $0.21 a year ago. Excluding the $0.02 unfavorable foreign exchange impact, Q2 2015 adjusted EPS grew 12% year on year.

The MedSurg segment sales and operating margin of $583 million and 30.4%, grew 7% and 0.2% year on year, respectively. At $743 million and 30.5%, global sales and adjusted operating margin for the Cardiovascular group increased 10% and 4.4% annually, respectively, driven by strong stent volumes and U.S. WATCHMAN revenue contribution. The Rhythm Management group reported flat year on year sales of $517 million, but saw a 190 basis point improvement in its operating margin, the sixth consecutive quarter of year-on-year adjusted operating margin improvement of 100 basis points or more.

CRM To Remain Soft Throughout 2015

In its Q1 2015 earnings call, Boston Scientific warned of weal worldwide CRM sales for the balance of 2015 due to difficult comparisons, replacement headwinds and competitive launches, particularly in the U.S. In Q2 2015, CRM sales declined by 1% year on year on account of some softness in the U.S. CRM sales. However, the company’s European CRM business delivered mid-single-digit growth for the fifth consecutive quarter in Q2 2015. Boston Scientific believes that it is gaining share in Europe with a differentiated portfolio, including full CRT-D and CRT-P Quad systems, ACCOLADE 3T MRI safe pacemakers, and its second generation S-ICD EMBLEM.

Boston Scientific anticipates its CRM business in the U.S. to remain soft for the rest of 2015. It expects to launch the 4 Quad in the U.S. in early 2016 and is transitioning into a full launch of EMBLEM S-ICD in the U.S. in Q3. Additionally, the company expects to have Ready MRI in the U.S. by the end of 2015. As the products driving growth in the European market become available in the U.S. as well as Japan, the company expects re-accelerated growth in its CRM business in the future.

While the global CRM year on year revenue growth is expected to be relatively flat in the second half of this year, Boston Scientific expects to deliver adjusted operating margin expansion in Rhythm Management (CRM is a sub-segment of the Rhythm Management group) .

New Product Launches To Help Sustain The Growth Momentum

Boston Scientific has several new product launches in the early phase of rollout, which – along with upcoming new products – is expected to sustain the company’s growth momentum in the future. Some of the new product launches include:

– The WATCHMAN Left Atrial Appendage Closure Device launched in the U.S. began its rollout recently. Boston scientific claims that the first 100 days of the U.S. WATCHMAN launch have been very successful, and expect to complete rollout of the first 100 accounts by the end of 2015.

– The launch of the next generation EMBLEM S-ICD and primary cell spinal cord stimulation system, Novi, launched in Europe.

– The SYNERGY Stent, which represents 30% of Boston Scientific’s European DES sales, remains on track for year-end 2015 U.S. approval.

– The company recently submitted its 510(k) for U.S. clearance of its integrated fractional flow reserve imaging system. It has planned a limited market release in both the U.S. and Europe in Q4 2015.

– LOTUS continues to penetrate the European market, and Boston Scientific remains on track to complete enrollment in both the REPRISE III IDE and RESPOND post-approval study by the end of the year.

– Key launches in EP, such as the navigation enabled IntellaNav and Open-Irrigated Ablation Catheter in Europe, slated for Q3 2015.

Q3 2015 Outlook

– Consolidated revenues in the range of $1.79 billion to $1.84 billion. Headwind from forex of approximately $125 million, assuming the current forex rates hold constant.

– On an operational basis, consolidated Q3 sales to grow year on year in a range of 4% to 6%.

– Adjusted gross margin in the range of 71.5% to 72.5%.

– Adjusted R&D rate of 11% to 12%.

– Adjusted operating margin of approximately 22.5%, +/- 25 basis points.

– GAAP and adjusted EPS in the range of $0.10 to $0.13 and $0.21 to $0.23, respectively.

Full Year 2015 Guidance

– Consolidated revenue in the range of $7.28 billion to $7.38 billion. Forex headwind of roughly $460 million, assuming the current forex rates hold constant.

– Adjusted operating margin of approximately 22.5%, +/- 25 basis points.

– GAAP and adjusted EPS in the range of $0.28 to $0.34 and $0.88 to $0.92, respectively.

 

 

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