After a dismal 2012, Boston Scientific's (NYSE:BSX) stock has rallied almost 25% in the past three months. This has been attributed mainly to apparent improvement in business conditions for major divisions including Cardiac Rhythm Management (CRM).
CRM products help in the treatment of abnormal heart conditions by the use of pacemakers and implantable cardioverter defibrillators (ICDs). This division is the second biggest revenue and value source for Boston Scientific with 2012 sales of $1.9 billion compared with an estimated market size of $18 billion. Boston Scientific has seen its market share decline from 25% in 2008 to around 11% in 2012, primarily due to significant competition for current products, new launches by competitors and safety issues related to its ICDs.
While we expect the medical device maker to continue to lose market share, the rate of decline should slow down going forward. We believe that existing pressure from ICD issues and intense competition will be offset by growth from launch of new products including next-generation subcutaneous-ICD (S-ICD) and Watchman devices.
We have a $8 price estimate for Boston Scientific, which is about a 10% premium to the current market price.
Subcutaneous-ICD: Gaining Traction Following Limited Launch
S-ICD do not require a transvenous lead to connect the ICD to the heart. Boston Scientific recently launched its S-ICD, that has been gaining traction since its limited launch in during the last quarter of 2012. (Read Boston Scientific Revised To $8 On Acquisitions, New Products & Cost Cutting Efforts)
The global ICD market is expected to reach $6 billion by 2015 and even a meager 10% more share could create $600 million in potential revenues for the device maker. While the sales of S-ICD will likely cannibalize some sales of Boston Scientific's own conventional ICDs, the fact that it is the only commercially available S-ICD in the market so far should help it gain market share from competitors. In addition, since concerns are being raised about the safety of leads, hospitals could begin to prefer advanced S-ICDs.
However, what may act as a dampener is that S-ICDs have not yet been shown to be safe and effective in a diverse patient population. Since ICDs are critical lifesaving devices, physicians would want to wait for more data before getting more comfortable with the use of S-ICD.
Expected FDA Approval For Watchman Will Lend Support
Watchman is implanted in atrial fibrillation (irregular heartbeat) patients to reduce the risk of strokes. While the device is already approved in many international markets including Europe, it still remains an investigational product in the huge U.S. market. The FDA has been waiting for more data to see the efficacy and safety of the device.
However, the much awaited results of a detailed clinical trial called “Prevail” came out recently, where Watchman devices demonstrated better safety results than what the earlier trial had suggested. The device posted a significant drop in serious complications (build-up of fluid around the heart and stroke) rate compared with the previous “Protect AF” trial. A higher rate of complications has been holding back FDA approval. With the new results, the company can now expect to receive FDA approval for the device soon.
The device has already seen a huge uptake in international markets with implants growing over by nearly 65% on a year-over-year. When approved in the U.S., we expect it to replicate its performance. Post approval, it will be the only device of its kind in the U.S. for the next couple of years and will have the first mover advantage in a potentially large market. Atrial fibrillation affects almost 3 million people in the U.S. alone. Boston Scientific estimates the market for the device to reach $500 million in the next five years.
But, in the Prevail trial, Watchman’s efficacy was similar to the standard blood thinner Warfarin in preventing stroke in atrial fibrillation patients. This could limit the device’s potential as without demonstrating better efficacy, the use of the device might remain limited to patients with high risk of bleeding, a serious side-effect of Warfarin. Without this, the device will not be able to achieve the $500 million in revenues estimated by Boston Scientific.
Disclosure: No positions.