Boston Scientific Earnings: New Products, Acquisitions Boost Performance

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BSX: Boston Scientific logo
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Boston Scientific

Boston Scientific (NYSE:BSX) posted strong third quarter results on October 28th. [1] The company’s revenue grew across all divisions in the third quarter, helped by the launch of new products and synergies from acquisitions. The U.S. launch of Synergy bio-absorbable polymer drug-eluting stents and the WATCHMAN left atrial appendage closure device, along with the acquisitions of Bayer AG and American Medical Systems’ Male Urology portfolio, contributed to the robust revenue growth. The top-line expansion was accompanied by solid improvement in non-GAAP operating margins derived through the company’s value improvement programs. On the flip side, Cardiac Rhythm Management (CRM) sales remained flat due to the softness in the global CRM market. [2] These trends are expected to continue over the next few quarters.

Boston Scientific third quarter performance snapshot:

  • Revenue grew by 2% year on year to $1.89 billion (9% in organic, constant currency terms)
  • Non-GAAP operating margin improved by 260 basis points year on year (in constant currency terms) to 23.1%
  • Non-GAAP diluted EPS grew by 18% year on year to $0.24

Our price estimate of $15 for Boston Scientific is about 20% lower than its current market price.

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See our complete analysis for Boston Scientific here

New Products Drove Across The Board Revenue Growth

Boston Scientific launched major new products earlier this year, which contributed to the strong organic revenue growth across each of its seven business units. Growth was led by the MedSurg segment, primarily due to the integration of the Male Urology portfolio acquisition. On the other hand, growth in the CRM unit remained sluggish amidst weak global demand. This trend is expected to continue in the near term. The following table summarizes the driving factors behind the growth of each of Boston Scientific’s business segments:

BSX Segment Growth

Margins Expand Despite Higher R&D Spending

Boston Scientific’s non-GAAP gross margin expanded by 120 basis points year-on-year in constant currency terms and reached 72.5% in the third quarter. The improvement was further compounded due to lower SG&A expenses as a percentage of sales, resulting in a 260 basis point expansion in non-GAAP operating margins. Fiscal 2015 has been a particularly strong year for Boston Scientific in terms of margin expansion, considering that its non-GAAP operating margin improved by over 200 basis points year on year in each of the first three quarters.

The improvement in margins is being driven by the higher gross margin of some of the newly launched products, such as the Emblem S-ICD and the Accolade family of pacemakers. Additionally, manufacturing variances pertaining to the Synergy product further boosted the non-GAAP operating margin by about 50 basis points in the third quarter. [2] This one-off benefit is not expected to persist in the coming quarters. Nevertheless, even excluding the aforementioned benefit, the company achieved its margin guidance through cost savings and higher gross margin of new products.

On the other hand, Boston Scientific stepped up its R&D spending in the third quarter of the year. Its R&D as a percentage of sales stood at 11.7%, in line with the company’s intention of higher R&D investments in the second half of the year. The increasing trend is expected to continue in the fourth quarter due to higher clinical trial activity, although the full year R&D as a percentage of sales is expected to remain at 11.5%. [2]

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Notes:
  1. Boston Scientific Investor Relations []
  2. Boston Scientific Fiscal 2015 Third Quarter Earnings Call Transcript, Seeking Alpha, October 28, 2015 [] [] []