BSX Posts In-Line Earnings, Narrows Guidance

Boston Scientific (BSX) reported adjusted earnings per share (after considering certain one-time adjustments other than amortization expense) of 10 cents in the third quarter of 2013, in line with the year-ago adjusted EPS figure.

However, considering amortized expense adjustments, the quarter’s adjusted EPS came in at 17 cents, beating the year-ago adjusted EPS by a penny. This also exceeded the company's adjusted EPS guidance range of 14–16 cents. The Zacks Consensus Estimate for the reported quarter was 17 cents.

However, without these adjustments, the company reported net loss of $5 million, or break-even EPS in the quarter, comparing favorably with year-ago net loss of $663 million or a loss of 48 cents a share.

Revenues remained flat year over year (up 4% at constant exchange rate or CER, excluding divested business) at $1.735 billion. Although the figure exceeded the Zacks Consensus Estimate of $1.729 billion, it remained within the company-provided guidance range of $1.700−$1.860 billion. The company also presented an encouraging performance in the BRIC (Brazil, Russia, India and China) nations with 28% (29% at CER) year-over-year sales growth during the quarter.

Segment Analysis

Boston Scientific currently has three global reportable segments comprising Cardiovascular, Rhythm Management and MedSurg.

The company generates maximum revenues from Cardiovascular, which comprises Interventional Cardiology and Peripheral Interventions. Sales in these sub-segments were $472 million (down 2% year over year at CER) and $195 million (up 7% at CER), respectively, during the quarter.

Global sales of coronary stent system (within Interventional Cardiology) were $277 million, down 8.9%. The downfall was owing to a disappointing performance from drug-eluting stents (DES) that declined 7.4% to $262 million, and bare-metal stents that plunged 28.6% to $15 million.

The next biggest contributor to Boston Scientific’s top line is Rhythm Management, which includes Cardiac Rhythm Management (CRM) and Electrophysiology. This segment also continued to disappoint with flat third-quarter revenues of $498 million on a year-over-year basis (up 1% at CER). Worldwide CRM revenues remained flat at $464 million.

Sales from pacemakers were down 0.7% to $134 million, while defibrillators edged up 0.9% to $330 million. Electrophysiology sales deteriorated 3% year over year (down 1% at CER) to $34 million.

Over the recent past, the company has been targeting new product launches to revive the sales of the beleaguered Interventional Cardiology and CRM segments. However, the dismal performance of these segments during the reported quarter proved beyond doubt that these measures have not been enough to counter the ongoing challenges.

Other segments like Endoscopy, Urology/Women’s Health and Neuromodulation (coming under the MedSurg broader group) recorded sales of $322 million (up 8% at CER), $131 million (up 8%) and $115 million (up 32%), respectively.

Margins

Gross margin grew 277 basis points (bps) year over year to 70.6%. Adjusted operating margin however contracted 98 bps to 18.6% in the quarter. During the reported quarter, selling, general and administrative expenses grew 11.7% to $658 million, research and development expenses dropped 1.4% to $217 million and royalty expense declined 3.4% to $28 million.

Balance Sheet

Boston Scientific exited the quarter with cash and cash equivalents of $571 million, up from $207 million at the end of fiscal 2012 and had long-term debt of $4.25 billion. The company generated operating cash flow of $250 million and repurchased 6.8 million shares during the quarter under the existing share repurchase program.

Guidance

Boston Scientific provided its fourth-quarter guidance and updated its fiscal 2013 outlook. In the upcoming quarter, the company expects to report adjusted EPS of 18–20 cents (considering amortized expense adjustments) on revenues of $1.780 to $1.830 billion. The current Zacks Consensus Estimate for EPS of 20 cents coincides with the higher end of the company’s outlook, although the same for revenues of $1.819 billion falls within the company’s guidance.

For full year 2013, the company tightened its revenue guidance to the band of $7.085−$7.135 billion (the earlier provided range being $7.050­­­−$7.170 billion). Adjusted EPS was narrowed to the range of 69−71 cents from 67−71 cents guided previously. The Zacks Consensus Estimate for revenues stands at $7.120 billion, while that for EPS is 70 cents.

2014 Restructuring Initiative

During the earnings call, Boston Scientific also announced a restructuring program for 2014. Major actions under this plan includes continued implementation of the company's ongoing Plant Network Optimization strategy, continued focus on driving operational efficiencies and current business and commercial model changes.

The company expects this plan to reduce gross annual pre-tax operating expenses by $150−$200 million by the end of 2015. It also plans to make savings through this restructuring program, to reinvest a part of it in strategic growth initiatives. According to BSX, this will lead to around 1,100−1,500 job cuts worldwide through attrition and targeted headcount reductions. The company expects this program to be brought into effect from the fourth quarter of 2013 through 2015.

CFO Transition

In a separate press release, Boston scientific also announced that its existing executive vice president and chief financial officer Jeffrey Capello will shed off his role effective Dec 31, 2013. Daniel Brennan, currently the company's senior vice president and corporate controller, will be taking up his position thereon.

Our Take

Boston Scientific managed to beat estimates in the third quarter of 2013. However, challenging economic conditions, competitive environment, pressure on core segments and currency fluctuations remain major headwinds.

Despite several initiatives undertaken by the company to revive its top line, we remain cautious as its core segments, implantable cardioverter defibrillator and DES continue to face challenges.

The US defibrillator market remains an overhang for Boston Scientific and its peers. The DES business in the U.S. has been witnessing challenges due to pricing pressure, lower procedural volume, lower penetration rates and share losses from the launch of Medtronic's (MDT) Resolute Integrity stent.

However, to revive its top line, Boston Scientific is focusing on strategic initiatives to drive growth and profitability. These include the recently announced restructuring initiatives, strengthening of its portfolio, targeting suitable acquisitions in areas of unmet medical needs, and focus on emerging markets. However, near-term visibility of these initiatives remains a matter of question.

Currently, Boston Scientific retains a Zacks Rank #2 (Buy). MedTech companies such as Mindray Medical International Ltd (MR) and Bio-Rad Laboratories, Inc. (BIO), which carry a Zacks Rank #1 (Strong Buy), are also worth considering.

Read the Full Research Report on BSX
Read the Full Research Report on MDT
Read the Full Research Report on MR
Read the Full Research Report on BIO


Zacks Investment Research