Despite Currency Headwinds, Boston Scientific Maintained Strong Growth Momentum In Q4

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Boston Scientific

Leading medical device maker, Boston Scientific (NYSE:BSX) reported its Q4 2015 earnings on February 4th. Boston Scientific’s growth was led by the growth in the Peripheral Interventions segment, primarily due to synergies associated with the Bayer acquisition. Further, the Synergy bio-absorbable polymer drug-eluting stents, the WATCHMAN left atrial appendage closure device, and the expansion of its urology portfolio via acquisitions drove growth for Boston Scientific in other segments. Despite foreign currency headwinds, the company saw a year over year revenue growth of 5% in Q4. Further, the company improved its operating margins by 210 basis points to 22.3% in 2015, and remained confident of improving its margins further to 25% by 2017. However, litigation issues and foreign currency effects will remain a concern for the company going ahead.

Our price estimate of $15 for Boston Scientific is approximately 15% below the current market price.

See our complete analysis for Boston Scientific here

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New Product Launches Likely To Drive Growth In 2016

Boston Scientific launched major products in 2015, which contributed to the strong organic revenue growth across each of its business units in Q4. However, the growth in the CRM (Cardiac Rhythm Management) unit remained sluggish amidst weak global demand. This trend is expected to continue in the near term. However, the company expects the division’s growth to pick up in the second half of 2016 with the launch of new products.

Further, Boston Scientific’s growth opportunity in the interventional cardiology segment will continue in 2016. This stems from the fact that the company’s Synergy bio-absorbable polymer drug-eluting stents got FDA approval only recently and have yet to see market adoption in the U.S. market. Moreover, given the significant advantages of this product over the previous versions, Boston Scientific has a significant opportunity to improve its market share in interventional cardiology. Additionally, the company anticipates Synergy DES to represent approximately 50% of the DES revenue mix for the company going ahead. Coronary stent sales contribute significantly to Boston Scientific’s Interventional Cardiology segment, which constitutes close to 30% of the company’s value according to our estimates. (For more details read as to how Boston Scientific Can Expand Its Share In The U.S. Coronary Stent Market With Synergy BP-DES)

Additionally, Boston Scientific’s launch of the single use digital flexible ureteroscope in January will also add to its urology segment’s revenue growth in the coming quarters. We believe that the company’s constant focus on bringing innovative and technologically advanced products in the market will help it maintain a leadership position.

The following table summarizes the company’s growth rate on a constant currency basis in each of the segments in Q4:

SI.No Segment Growth Rate 
1 Interventional Cardiology 6%
2 CRM -1%
3 Endoscopy 7%
4 Peripheral Interventions 10%
5 Neuromodulation 7%
6 Urology 7%

 

Foreign Currency Effects Will Continue To Impact Results In 2016

Boston Scientific expects foreign exchange to negatively impact its revenues by as much as $150 million in 2016. It must be noted that foreign currency fluctuations negatively impacted the company’s EPS by as much as $0.10 in 2015 versus its original expectation of $0.04 a year ago.

A strengthening U.S economy and weakening economic trends in the emerging markets have caused the U.S dollar to strengthen relative to the currencies in other regions. Also, a devaluation of Chinese Yuan to spur exports and the Fed rate hike in the U.S has strengthened the U.S dollar even more. Furthermore, a decline in oil prices has caused a challenging macro environment in many oil driven economies. The aforementioned factors have together contributed to the negative foreign currency effects that were experienced by Boston Scientific in 2015. We believe that these macroeconomic conditions can prevail in 2016 too and can affect the company’s profitability.

However, Boston Scientific claims to offset the decline in revenues due to the foreign currency effects from new product launches, cost reduction programs and hedging contracts.

Litigation Related Charges Weighing Heavy On Boston Scientific’s Profitability

Boston Scientific incurred litigation related charges of $1,105 million in 2015, which is approximately 20% of its revenues for the year. After SG&A expense, litigation expense was the second largest operating expense incurred by the company in the year. To illustrate the effect of these litigation related charges, it must be noted that if the company had not incurred these charges, it would have reported a positive net income. Boston Scientific reported a net loss of $239 million in 2015.

The company incurred around $456 million of litigation related charges in Q4 itself. Boston Scientific attributed these charges to the increase in liability reserves for Maryland and Mirowski case and the lawsuits related to transvaginal mesh devices. The company is looking to seek review for the Mirowski case, in which it was asked to pay $308 million as damages. On the other hand, the transvaginal mesh lawsuits can be a much larger liability for Boston Scientific.

Boston Scientific had to pay more than $100 million in 2015 to settle around 3,000 charges related to transvaginal mesh lawsuits. According to the company, there are still around 35,000 cases outstanding against it related to the same issue. Even though transvaginal mesh accounts for less than 7% of Boston Scientific’s revenue, going forward the company might have to pay significant amounts as litigation charges to settle the large number of cases.

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