Boston Scientific (NYSE:BSX) is expected to announce its Q2 2014 earnings on Thursday, July 24. After several years of dismal sales, the global medical device maker returned to positive sales growth in 2013 and continued the momentum in the first quarter this year. Overall operational sales, excluding the divested Vascular business, increased 4% year-over-year (y-o-y) to $1.77 billion in Q1 on the back of strong performances by each of the company’s divisions except Cardiac Rhythm Management (CRM). The company’s largest division- Interventional Cardiology (IC) – reported low-single-digit growth in the quarter, reflecting a significant improvement over its mid-single-digit decline in the preceding quarters. Operational sales in the Neuromodulation business continued to grow in double digits, while other divisions such as Endoscopy, Peripheral Interventions and Urology also reported consistent mid-single-digit growth. 
As Boston Scientific comes out with its second quarter earnings, we expect its global sales to grow in low single digits driven by increasing acceptance of its new products such as S-ICD (Subcutaneous-Implantable Cardioverter Defibrillators), Promus PREMIER stent, the Lotus Transcatheter Aortic Valve (TAVR) device and the anti-stroke Watchman device. We also expect the company’s bronchial thermoplasty system- Alair – to continue with its double-digit sales growth in established as well as emerging markets. Accordingly, the company should be able to meet its operational sales guidance of $1.84 billion – $1.89 billion for the quarter. On the cost side, we expect margins to continue improving on account of the company’s effective implementation of its “Plant Network Optimization” strategy. The company expects gross margins to be in the range of 70-71% for the quarter. 
We have a price estimate of $13 for Boston Scientific, which is roughly in line with the current market price.
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IC Sales Growth to Continue
Interventional Cardiology (IC) is the largest division for Boston Scientific, contributing over 28% of the company’s value according to Trefis estimates. It derives its revenues primarily from the sale of coronary stents and catheters. In the past few years, IC sales declined rapidly owing to macroeconomic headwinds and increasing competition. However, the business is turning around on account of improving economic conditions and growing acceptance of new products.
In the first quarter this year, IC sales grew by a modest 1% year-over-year on a constant currency basis, to about $500 million, on the back of strong sales of the Promus PREMIER drug-eluting stent (DES) system in the U.S. and solid overall growth in Europe, except Germany.  Going forward, we expect sales to continue to grow, driven by strong uptake of the Promus PREMIER stent system in the U.S., the launch of new products such as SYNERGY stent and Lotus TAVR, and expansion into Europe, Japan as well as emerging markets.
Primarily launched in established markets, where its premium price is more likely to be supported by customers, SYNERGY is a premium bio-absorbable stent product. It is a next-generation DES that dissolves inside the body within three months. It received CE approval in Europe in Q4 2012 and has shown impressive uptake despite its premium price. The company recently reported strong performance data for this device, analyzing the three-year follow-up data of its EVOLVE clinical trial. The trial compared the SYNERGY bioabsorbable stent system with the PROMUS DES system in terms of safety as well as performance. The EVOLVE trial follow-up data was promising in both respects and also supported the idea that the bioabsorbable polymer stent technology could result in better healing than DES. 
Compared to the developed market focus for SYNERGY stents, the cheaper PROMUS stent is being targeted at price-sensitive emerging markets. This strategy to target specific IC products for particular geographies is starting to pay off with increased sales, and could help the company improve its IC market share in emerging markets as well. Boston Scientific’s overall operational sales grew 22% in emerging markets in the first quarter this year, taking the contribution of emerging markets in overall sales to 9%.
CRM Sales Growth Likely to Revive
Cardiac Rhythm Management (CRM) is the second largest division for Boston Scientific and contributes over 26% of the company’s value. It derives its revenues primarily from the sale of pacemakers and defibrillators. Much like the company’s IC business, CRM sales were also on the decline in the past few years on account of macroeconomic headwinds and increasing competition. In a bid to revive declining CRM sales, the company launched several promising products in the last two years, including the S-ICD, MINI ICD, ACUITY™ X4 QUAD Lead and the Watchman device for atrial fibrillation patients. The company recorded solid sales from the S-ICD in 2013, even though it was largely unavailable in the second and third quarters due to manufacturing problems.  
In the first quarter this year, CRM sales declined by 2% y-o-y on a constant currency basis to $466 million, on the back of sluggish sales of its defibrillator systems in the U.S. Although the uptake of its S-ICD (Subcutaneous-Implantable Cardioverter Defibrillator) systems was ‘very positive’, the company faced headwinds for its CRT-D in several markets including the U.S., Japan and Australia.
We expect sales of the S-ICD and ACUITY Lead to increase going forward as supply issues are resolved to match the sustained high demand. The S-ICD device presents a great opportunity for Boston Scientific as the product currently has no major competitors, and the company estimates that the market will grow to over $750 million worldwide by 2020. The S-ICD product is also a significant aspect of the company’s plans to improve CRM margins within the next three years.Notes:
- Boston Scientific Corporation’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 29, 2014 [↩] [↩] [↩]
- Press release, Boston Scientific, May 21 2014 [↩]
- Boston Scientific Management Discusses Q4 2013 Results – Earnings Call Transcript, SeekingAlpha, February 04, 2014 [↩]
- Boston Scientific Pauses Hypertension Trial on Rival Failure, The Washington Post, Jan 16 2014 [↩]