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Boston Scientific Beats by a Penny

Zacks Equity Research

The challenges rife in Boston Scientific Corporation’s (BSX) core segments consisting of stents and defibrillators do not show any sign of abatement. Revenues declined 3% year over year to $1.866 billion during the first quarter of 2012, but surpassed the Zacks Consensus Estimate of $1.858 billion. Excluding the impact of divested businesses and at constant exchange rates (“CER”), net sales dropped 3%.

While revenues derived from the domestic market declined 4% year over year to $978 million, international revenues remained unchanged at $859 million (at CER). Other than the 9% growth in the Inter-Continental market ($205 million), Boston Scientific recorded a drop in revenues in both Japan (2% at CER to $238 million) and EMEA (3% at CER to $416 million).

The company reported earnings per share (EPS) of 8 cents during the reported quarter compared with 3 cents in the first quarter of fiscal 2011. However, after considering certain adjustments (other than amortization expense), the adjusted EPS came in at 9 cents, a penny above the Zacks Consensus Estimate, but lower than the year-ago quarter’s adjusted EPS of 15 cents.

As per the guidance provided during fourth quarter results, Boston Scientific expected to report adjusted EPS of 5–8 cents on revenue of $1.825−$1.90 billion during the quarter. While the company exceeded its EPS forecast, revenue was within the guidance.

Segment Analysis 

Boston Scientific derives maximum revenues from Cardiovascular, which comprises Interventional Cardiology and Peripheral Interventions. Sales at these sub-segments were a respective $603 million (down 5% year over year at CER) and $190 million (up 8%), during the quarter.

Global sales of coronary stent system (within Interventional Cardiology) at $387 million declined 5.8% due to disappointing performance from both drug-eluting stents (“DES”) that declined 4.2% to $363 million and bare-metal stents that plunged 20% to $24 million.

The next biggest contributor to Boston Scientific’s top line, Cardiac Rhythm Management (“CRM”), continued to disappoint with a 10% drop in sales to $501 million during the quarter. Sales from pacemakers and defibrillators declined 6.3% to $133 million and 11.7% to $368 million, respectively.Over the recent past the company has been targeting new product launches to revive the sales of the beleaguered Cardiovascular and CRM segments. However, the dismal performance of these segments during the reported quarter proves that these measures were not enough to ride over the challenges currently at play.

Other segments of the company, namely – Electrophysiology, Endoscopy, Urology/Women’s Health and Neuromodulation – recorded sales of $37 million (up 1% year over year at CER), $302 million (up 5%), $120 million (unchanged) and $84 million (up 8%), respectively.


The company was adversely affected by a 100 basis point (bps) year-over-year drop in gross margin to 66.2%. Moreover, operating margin came down to 16.8% in the reported quarter from 22.6% in the year-ago period affected by a 10.6% rise in selling, general and administrative expenses. Research and development expenses of $215 million inched up 1.4% year over year while royalty expense recorded a 5.9% decline to $48 million.

Balance Sheet

Boston Scientific exited the quarter with cash and cash equivalents of $284 million, up from $267 million at the end of fiscal 2011 with long-term debt of $4.2 billion. The company repurchased 23 million shares during the quarter taking the total repurchase under the 2011 share repurchase program to 100 million shares.

While lower margins adversely affected the company’s bottom line, it did experience a positive impact from the 5.3% decline in the share count as a result of the continuous share buyback program as well as an 8% decline in interest expense.


For the second quarter of fiscal 2012, Boston Scientific expects to report adjusted EPS of 8–11 cents on revenue of $1.85−$1.95 billion. The current Zacks Consensus Estimates of 10 cents in EPS on $1.897 billion in revenues are within the company’s guidance.

For the fiscal, the company tightened its revenue guidance to $7.35−$7.65 billion compared to the prior expectation of $7.3−$7.7 billion. The EPS guidance, however, remained unchanged at 36−46 cents. The Zacks Consensus Estimates for revenue and adjusted EPS stand at $7.47 billion and 42 cents, respectively.


The headwinds currently at play for Boston Scientific’s CRM segment also had an adverse impact on its peer, St Jude Medical’s (STJ) first quarter performance that was reported yesterday. Besides, economic uncertainty is continuing to affect procedure volume.

Accordingly, the company remains focused on strategic initiatives to drive growth and profitability. The launch of Promus Element in the US and Japan along with the Ingenio family of pacemakers in Europe should provide some cushion to the struggling device maker. Besides, we are encouraged by the company’s decision to acquire Cameron Health, which would bring in the unique subcutaneous implantable cardioverter defibrillator.

Longer term, we have a Neutral recommendation on Boston Scientific. The stock retains a Zacks #3 Rank (“Hold”) in the short term.

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