Boston Scientific's (BSX) stock has zoomed 10% higher this week in part due to the news that the FDA has raised fresh concerns about the defibrillator leads -- leads connect an implantable heart defibrillator device to the heart -- from St. Jude Medical (STJ), one of its biggest competitors in the Cardiac Rhythm Management (CRDM) market. St. Jude is already grappling with the recall of its "Riata" leads last year. Boston Scientific could benefit from the fresh troubles for its competitor, as it has seen a sharp decline in sales within the segment due to weak demand in the market and regulatory issues. Below we assess what it could mean for the company.
We have a $6 price estimate for Boston Scientific, a 5% premium to the current market price.
Cardiac Rhythm Management Division: Past and Expectations
The company's Cardiac Rhythm Management division makes pacemakers and implantable cardioverter defibrillators (ICDs), which help in the treatment of abnormal heart conditions. The division is the second biggest revenue and value source for Boston Scientific, with 2011 sales of $2.1 billion.
Boston Scientific's market share in Cardiac Rhythm Management declined from 25% in 2008 to around 13% primarily due to significant competition and lost share related to investigations by the U.S. Department of Justice. Furthermore, overall market demand has also shrunk following tight inventory management by hospitals in the U.S. and Europe. We forecast the company’s market share declining from above 12% currently to about 7%-8% by the end of our forecast period as a result of potential issues related to the aforementioned lawsuit as well as intense competition.
Opportunity Emerges From St. Jude Medical's Troubles
St. Jude Medical generates about $200 million from its U.S. ICD lead business (about $1.8 billion from total ICD business), which could be up for grabs due to the aforementioned troubles. This gives Boston Scientific, the third-largest lead maker in the U.S., a chance to regain its footing in the market. Furthermore, as concerns are being raised about the safety of leads, hospitals could begin to prefer advanced Subcutaneous ICDs, which have an advantage over other ICDs as they do not require a transvenous lead to connect the device to the heart. The company last year acquired Cameron Health, which builds these next generation Subcutaneous ICDs. Furthermore, the product already has been approved by the FDA. If the company manages to capitalize on the situation, it could more than arrest the expected decline in sales going forward.
However, it may be easier said than done, as another major competitor and the largest maker of leads, Medtronic (MDT), will also be vying to benefit from the situation. Despite recent business challenges, Medtronic has managed to do well in the CRDM market and is relatively better off than many competitors. However, looking at the reaction in both companies' shares, it seems the market is expecting Boston Scientific to benefit more.
Disclosure: No positions.