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Boston Scientific (NYSE:BSX) released its earnings for Q3 on October 24. The company’s results reflect the same story that has played out so far this year – its smaller divisions are growing fast, while two of its largest divisions, Cardiac Rhythm Management (CRM) and Interventional Cardiology (IC), are stabilizing after a long period of revenue declines. Overall, the company’s net revenue remained about flat year-on-year, but going forward we expect it to start increasing as the CRM and IC divisions return to growth. On the cost side, the company plans to further cut costs in order to keep margins high.
Our current price estimate for its stock remains more or less unchanged at around $13, which is 12% above the current market price. Below, we provide an update on some of the most prominent trends for the company.
Key Business Revenues Are At an Inflexion Point
Over the past few years, Boston Scientific has reported revenue declines due to headwinds in the CRM and IC divisions. The IC division was primarily impacted by a decline in the number of procedures, caused by a weakening of the U.S. economy and austerity measures in Europe, while sales of the CRM division were falling due to significant competition and safety issues related to some implantable cardioverter defibrillators (ICD).
However, both of these divisions have started to turn around as demand is picking up, and some of the company’s new products are growing fast. During Q3, the CRM division managed to log growth for the first time in several quarters, with a sales increase of 1% on a constant currency basis. The IC division’s sales are still declining, but the rate of decline, at just 2%, is slower than in most of the past several quarters. 
New Products Are Behind The Turnaround
Boston Scientific’s CEO mentioned on the conference call that their Promus PREMIER and SYNERGY brands of stents are doing well in Europe, and driving the improvement in IC division sales. He expects Promus PREMIER to secure U.S. FDA approval in Q4 2013, which could further improve IC division revenues. The SYNERGY brand, although some time away from a launch in the U.S., continues to attract interest there as enrollment in a randomized clinical trial of SYNERGY was completed in September. 
The company’s subcutaneous ICD (s-ICD) demand also remains high, and the company is in the process of easing supply constraints in order to meet demand. The s-ICD platform was recently awarded the prestigious Prix Galien award for Best Medical Technology, highlighting its potential in the market. ((Boston Scientific Management Discusses Q3 2013 Results – Earnings Call Transcript, SeekingAlpha, October 24, 2013))
Watchman devices are doing well too, as their international sales and implants increased by 45% over the same quarter last year. In the U.S., it is expected to receive regulatory approval by Q2 2014. Boston Scientific estimates the overall market for the device will reach $500 million by 2020.  
Going forward, we expect the market shares of both the CRM and IC divisions to begin to stabilize as these products continue to grow and are launched in more countries. For more details on these products, please refer to our pre-earnings article: Boston Scientific Earnings Preview: New Products and Margins In Focus
Margins Are Also Likely To Improve
Boston Scientific also announced that it would be cutting costs through the end of 2015 by shutting some plants down and reducing headcount, which it expects will lead to cost reductions of around $150- $200 million annually. However, some of the gains are likely to be offset by the new medical device tax. We have altered our forecasts for the company’s margins accordingly. Notes:
- Press Release, Boston Scientific, October 24, 2013 [↩] [↩]
- Boston Scientific Management Discusses Q3 2013 Results – Earnings Call Transcript, SeekingAlpha, October 24, 2013 [↩]
- Company website, Boston Scientific [↩]
- Boston Scientific’s Mahoney Says Watchman Key to Growth, Bloomberg, May 11, 2013 [↩]