Boston Scientific Remains Neutral


We have reaffirmed our Neutral recommendation on Boston Scientific Corporation (BSX) with a target price of $5.75 following its second quarter fiscal 2012 results.

Boston Scientific reported loss in the reported quarter primarily due to $3.405 billion of impairment charge related to its EMEA business. The company reported adjusted earnings of 11 cents per share, in line with the Zacks Consensus Estimate while revenues lagged the estimates with a decline of 7% to $1.828.

Boston Scientific continues to witness various headwinds in its core segments. Despite this, several of its businesses such as Peripheral Interventions, Endoscopy and Urology recorded mid-to-high single digit growth (at constant currency) with Neuromodulation being the most impressive with 10% growth during the reported quarter.

The company is working on portfolio expansion, with many approved in the recent past and some in the pipeline. The European launch of Emerge PTCA dilation catheter in the second quarter has started contributing to the top line. Moreover, the product is scheduled for its launch in the US in the third quarter of 2012. We are encouraged to note that favorable data were presented at a recent conference on the next generation Synergy DES with CE Mark expected in late 2012. A limited market release is planned which will be focused on building clinical evidence to support a full European commercial launch in early 2014. Meanwhile the VANTAGE study, a European clinical trial for the treatment of Parkinson's disease using the Vercise deep brain stimulation system, is scheduled for completion in 2013.

Against the backdrop of flattening or declining sales in developed markets like the US and Europe, Boston Scientific is gradually strengthening its presence in the emerging markets of India and China that recorded over 40% growth on a combined basis during the reported quarter. The company plans to invest approximately $150 million in China, one of the world’s fastest growing and largest medical devices markets, over the next 5 years to build a local manufacturing operation to cater to Chinese market needs and develop a training center for healthcare providers. PCI volume in the US market is likely to be in the low-single digits, which could be offset by robust growth in the international markets, especially in the emerging markets.

Despite the several initiatives undertaken by the company to revive its top line, we remain cautious as the company’s core segments continue to witness several headwinds. As a result of the continued trend of lower procedure volume and pricing pressure in the US, the company’s share in the defibrillator market dropped by 100 basis points compared to the year-ago period. The CRM market will continue to remain sluggish in 2012, declining approximately 3−5% for the full year on a constant currency basis. The DES business in the US continues to witness challenges of pricing pressure, lower procedural volume and lower penetration rates. However, the situation is improving gradually. As a result of these headwinds, the company’s top line continues to remain under pressure.

Unfavorable currency movement has been a major dampener during the quarter, which was also reflected in the earnings of other important players such as St Jude Medical (STJ), and Johnson & Johnson (JNJ), among others.

Our recommendation is backed by a Zacks #3 Rank (Hold) in the short term.

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