Boston Scientific’s Heart Valve Delay: Does It Matter?

-7.01%
Downside
68.49
Market
63.69
Trefis
BSX: Boston Scientific logo
BSX
Boston Scientific

A couple of weeks ago, Boston Scientific (NYSE:BSX) announced that its expected launch of Lotus Heart Valve in the EU and U.S. in early 2018 will be delayed. The company did not specify the extent and cause of the delay. This has spooked investors and has contributed to a more than 10% decline in the stock price since then. A few important questions arise here. First, why is the Lotus Heart Valve so important for Boston Scientific? Second, does the 10% decline make sense as a result of this delay? In terms of the importance, the concern surrounding the valve stems from the company’s product recall earlier this year. Boston Scientific recalled Lotus Heart Valve in February 2017 due to a locking mechanism issue, giving its rivals a competitive edge. The delay casts doubt over the success of Lotus devices going forward, and this is not limited to just Lotus Heart Valve, but also extends to the Lotus Edge Device. Lotus devices are competitive devices in a market that has stiff competition, and are therefore important for the company’s continued growth.

Our price estimate for Boston Scientific stands at $30, implying a slight premium to the market price.

Market May Be Overreacting

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To answer the second question, we believe that the short-term monetary impact of the Lotus Heart Valve delay doesn’t really justify nearly a 10% decline in Boston Scientific’s market price. The 2017 global sales estimates for Lotus devices, prior to the device recall, ranged from $100-125 million. A 10% decline in Boston Scientific’s market price implies well over a $3 billion value loss, which translates into a revenue multiple of nearly 30. This doesn’t add up even if we assume a very high annual growth rate for Lotus Devices for the next 5 to 6 years. In other words, we don’t believe that the decline is solely in response to the one product delay. Rather, the decline likely reflects concerns around Boston Scientific’s broader competitiveness in Interventional Cardiology going forward, rather than being solely related to Lotus devices. The market is very competitive as it is. Boston Scientific’s coronary stent sales, which are part of the Interventional Cardiology division, have suffered in recent years due to the performance of some of its drug-eluting stents. A 10% downside makes more sense if Interventional Cardiology segment’s revenue growth were to halt.

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