New FDA approval
Boston Scientific Corporation (BSX) is continuing to expand its range of electrophysiology (EP) products, with U.S. Food and Drug Agency approval, for the IntellaTip MiFi™ XP catheter and 510(k) clearance of the Zurpaz™ 8.5F steerable sheath. Catheter ablation is a electrophysiological procedure in which localized electrical energy is delivered to the heart tissue with the objective of restoring continuous normal heart rhythm and has now become the first line of treatment for patients who suffer from certain kinds of irregular heartbeats. The company's next generation of EP tools is redefining ablation technology.
The IntellaTip MiFi XP is a first of its kind high resolution catheter that provides information necessary to pinpoint locations for ablation, a key element for success. It will be used for ablation of atrial flutter, an arrhythmia condition that affects approximately one million patients in the U.S. The Zurpaz 8.5F steerable sheath provides access to the heart and facilitates the placement of catheters for a variety of procedures, including treatment of atrial flutter, atrial fibrillation, and ventricular tachycardia. It will help clinicians to deliver catheters consistently and safely when undertaking electrophysiological procedures.
Second quarter finances
Boston Scientific reported an adjusted EPS of $0.12 per share for the quarter, compared to $0.11 in the previous year. After excluding amortized expense adjustments, the adjusted EPS works out to $0.18 per share, compared to $0.17 per share in the previous year and the consensus analysts' estimates of $0.16 per share. Revenues at $1.809 billion declined 1% year on year but were ahead of the consensus analysts' estimate of $1.779 billion. Performance in the BRIC countries was impressive with sales growth of 29%. Gross margin increased by 2.32% YoY to 70.7%, and the adjusted operating margin grew by 58 basis points to 19.2%.
The company derives its maximum revenues from the cardiovascular segment (comprising of Interventional Cardiology and Peripheral Interventions). Revenues in these sub-categories were $520 million (down 3% year over year at CER), and $199 million (up 5% at CER) during the quarter. Within the Interventional Cardiology segment, sales of stent systems at $304 million were down 10.6% because of a 9.7% decline in sales of drug-eluting stents and a 22.7% decline in bare-metal stents. The second largest contributor to revenues, Rhythm Management [comprising of Cardiac Rhythm Management (CRM) and Electrophysiology], also had a disappointing performance with a 2% decline in revenues to $511 million. It is clear that new product launches in these segments have not been able to offset the current challenges. The company ended the quarter with cash and cash equivalents of $530 million compared to $207 million at the end of the fiscal year 2012 and long term debt of $4.25 billion. Cash flow from continuing operations amounted to $396 million.
For the third quarter, the company expects to record an adjusted EPS of 14-16 cents per share on revenues of $1.700-$1.860 billion against the consensus analysts' estimates for EPS of 16 cents per share and revenues of $1.715 billion. For the full year 2013, the company increased its revenue guidance to the range of $7.050 to $7.170 billion with an adjusted EPS in the range of $0.67-$0.71 per share compared to the analysts' consensus estimate for revenues of $7.052 billion and EPS of $0.67 per share.
Boston Scientific and its peers
Boston Scientifics' long-term growth rate was only 8.4%, which is lower than the industry average of 10.6%. It also has a much higher forward earnings than its peers, such as St. Jude Medical (STJ) and Medtronic (MDT). The market values Boston Scientific at over 22 times the forward earnings compared to just over 13 times for St. Jude Medical and around 13.5 for Medtronic. For the full year 2013, St. Jude Medical expects to earn around $3.70 to $3.73 per share and, on a constant currency basis, the adjusted EPS could grow by 11%-12% and the dividend yield is 1.90%. Medtronic is seeking growth from emerging markets and is focusing on cost reduction and improvement in operating efficiency. It offers a dividend yield of around 2%.
The investment thesis
Despite looking relatively expensive, there are reasons why Boston Scientific stock is worth buying. The defibrillator and stent markets in the United States continue to be difficult and make up around 35% of the company's sales. However, despite all the problems, the company has posted solid results for the second quarter, beating expectations on both top line and bottom line. Based on these results, the company has raised guidance for both 2013 revenues and EPS. It has a good pipeline of products under development to drive future growth, and the focus on emerging markets is encouraging. It is also investing $150 million over the next five years in China to establish a local manufacturing facility. The rating on this stock would definitely be a "Buy".