Revising Boston Scientific To $6 On Weaker Sales

Boston Scientific (NYSE:BSX) recently announced its quarterly earnings for Q2 2012, in which it reported a steeper than expected decline in sales. The company generated $1.82 billion in sales, a decline of 7% from last year as it continues to face challenges mainly in its Interventional Cardiology and Cardiac Rhythm Management businesses. The strengthening of the U.S. dollar also contributed 3% of the sales decline while the gross margins improved following the company’s cost-cutting efforts.  However, the company actually posted a loss due a one time $3.41 billion impairment charge following weak European market. The company also lowered its 2012 earnings outlook.

In the wake of its earnings announcement and deteriorating market conditions, we have reduced our price estimate for the company to $6 from $7, which is about 10% ahead of the market price. 

See our complete analysis of Boston Scientific

Weak Performance Across Divisions

The company’s Interventional Cardiology franchise fared worse than our initial expectations as it continues to lose market share due to lower demand for stents and growing competition. Revenues from this business declined 13% even before including the currency impact. The Cardiac Rhythm Management business is also losing market share faster due to shrinking demand for its defibrillators. We believe that the company will continue to face hiccups and we have further lowered our 2012 market share projections for these businesses from our earlier estimate. In 2011, Interventional Cardiology and Cardiac Rhythm Management accounted for approximately 33% and 27% of total sales, respectively and contribute more than 50% to the company’s value according to our estimates.

While some of the decline was offset by revenue growth in the Endoscopy and Peripheral Interventions businesses, we believe the company underperformed relative to the respective markets for these businesses, leading to a decline in market share. Therefore, we expect market share to decline as opposed to our initial expectations of marginal improvement.

Sales from the U.S. slumped by 9%, while Europe, Middle East and Africa (EMEA) declined 11% partially because of depreciation of the Euro relative to the USD. Sales from other countries including emerging markets continued to grow by 11%, if we exclude the 7% unfavorable currency impact. We expect that emerging markets will continue to grow at robust rate and see their overall revenue contribution to the company growing.

Significant Improvement in Margins

The company’s cost reduction efforts such as moving manufacturing to low cost Costa Rica and lowering administrative costs were fairly visible through an improvement in margins. Further, the company also started selling its own updated version of Promus Element stent, originally licensed from Abbott Labs (NYSE:ABT). It offset bit of pricing pressure, the company is already facing with many of its products.

While we have increased our margin expectations for 2012, we still believe that margins will decline to some extent going forward. We expect the company will continue to face pricing pressures following the U.S. healthcare reforms and European austerity measures.

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