Boston Scientific's Device To Relieve Severe Asthma: A Major Opportunity

| About: Boston Scientific (BSX)

Boston Scientific (NYSE:BSX) has been through a rough patch since 2006 when it bought Guidant for $27 billion. Shares are down more than 50% over the past five years and the stock is cheap, the 52-week range being $4.79 - 6.67. But it is working on turning things around and part of the turnaround is a long line of innovative and improved products, of which bronchial thermoplasty, called the Alair asthma treatment, is one example.

Earlier in 2012 Boston Scientific's incoming CEO Michael Mahoney said about the Alair asthma treatment that it will be marketed in 20 countries and 200 sites by the end of the 2012. Mahoney predicted that the worldwide market for bronchial thermoplasty will hit $1 billion by 2020.

Bronchial thermoplasty is the first non-drug treatment for asthma, approved by the FDA in 2010. It is intended for adults whose severe and persistent asthma is not well-controlled with inhaled corticosteroids and long-acting beta agonist medications. The Alair system treats asthma symptoms by using radiofrequency energy to heat the lung tissue, reducing the thickness of smooth muscle in the airways and improving a patient's ability to breathe.

The procedure

During bronchial thermoplasty, a pulmonologist inserts the Alair Catheter into the patient's lung airways through the working channel of a bronchoscope. A bronchoscope is a commonly-used instrument with a small light and camera that is inserted through the nose or mouth.

Once inside, the Alair catheter heats up the lining of the lungs in 10-second bursts of radio waves to 149 degrees Fahrenheit. That destroys some of the smooth muscle in the airways which constricts during an asthma attack, making breathing difficult. After the procedure, the airways no longer are so prone to constricting, and asthma patients suffer fewer attacks and need fewer hospital visits. The procedure is completed in three sessions, spaced three weeks apart and each time, a different section of the lungs is treated. Bronchial thermoplasty is performed under conscious sedation with local anesthesia on an outpatient basis in three 30-60 minute procedures.

Bronchial thermoplasty is a once in a lifetime treatment. The procedure is currently available in more than 150 medical centers in 40 states in the US. Radiofrequency ablation has been used in the past decade for the treatment of cardiac arrhythmias and lung cancer.

Not a cure

Researchers at Washington University School of Medicine found that compared with a control group, bronchial thermoplasty patients saw their asthma attacks drop by a third, their emergency room visits fall by 84 percent, and the number of days they lost from work and school drop by 66 percent.

But it is not a cure for asthma and it isn't expected to rid patients of medications completely. It has not been shown to improve lung function or reduce over-response in the airways that triggers the need for rescue medications.

Severe Asthma

Asthma is a chronic inflammatory disorder of the airways that affects an estimated 300 million individuals worldwide, including 24 million persons in the United States. The prevalence of asthma is increasing, especially in children, and it is the most common chronic disease in childhood. The World Health Organization has estimated that approximately 500,000 hospitalizations are due to asthma each year. In the United States, asthma prevalence, having increased from 1980 to 1996, showed a plateau at 9.1% of children (6.7 million) in 2007.

Avoiding allergens and using inhaled medications are enough to keep asthma under control in most patients. But for the minority with severe persistent asthma, medication and lifestyle changes are not enough. Frequent hospital trips become a way of life, and powerful steroids like prednisone - which can cause thinning bones, cataracts, depression and other debilitating side effects - become a necessity.

The pharmaceutical market for asthma medication is intensely competitive. The leading medications for asthma include Advair from GlaxoSmithKline (GSK), Singulair from Merck (MRK), Symbicort from AstraZeneca (AZN) and Xolair from Novartis (NVS). These drugs are for life and do not cure asthma, merely alleviating symptoms. The therapy of asthma has not changed much in the past decade, until the arrival of Bronchial Thermoplasty.


Asthma care is one of the most common and costly chronic conditions for insurers. Americans spend nearly $18 billion on asthma, the majority of which is spent on treating the illness through emergency hospital visits and multiple medications, according to the Asthma and Allergy Foundation. Over half of what is spent is on severe asthmatics, who make up only 10 percent of the asthma population.

Bronchial thermoplasty has given doctors a new weapon in the battle against severe asthma, and many patients call it life-changing. But the procedure is expensive, costing around $20,000, and insurers have been reluctant to cover it. Although five-year follow-up studies have found the procedure to be safe and effective, most insurance companies still consider the procedure experimental. As a result, many people who need it, are forced to go without it.

The one-time cost of $20,000, is dwarfed by the tens of thousands of dollars in hospital bills and medication costs that a severe asthmatic can easily accumulate in a single year. Fortunately, effective January 1, 2012, the Alair catheter is eligible for Medicare reimbursement through a separate "pass-through" payment when the procedure is performed in an outpatient hospital setting.

Boston Scientific

The Alair treatment was developed and guided through approval by a small California company, Asthmatx. Boston Scientific bought the company in 2010 for $193.5 million. According to Trefis stock analysts, in 2011 the endoscopy equipment division, to which the new treatment belongs, accounted for approximately 16% of Boston Scientific's sales which were $7.62 billion in 2011. In 2012 this share is estimated to rise to 18%.

Boston Scientific is facing weak markets for its key products, heart stents, and implantable heart defibrillators. Sales are down because the number of hospital procedures dropped, partly due to the weak economy and partly to bad publicity surrounding their use.

But things maybe turning around. A new CEO is coming in on November 1, 2012: Michael Mahoney, a former Johnson & Johnson executive. He is currently president of the company.

The company has started manufacturing its own stents. Boston Scientific has been selling a stent under the Promus name, but paid Abbott 40 percent of sales under a royalty agreement. Once Boston Scientific transfers Promus technology to the Promus Element Plus stent, it no longer will pay fees to Abbott. Largely because of this, in the second quarter gross margins, as a percentage of net sales improved to 68.4%, from 65.2 percent in the same period of the year before.

The higher margins will help the company, once revenue picks up. In June 2012 the FDA approved the longer lengths of Promus Element Plus stent which follows the approval of Promus Element Plus in the US in November 2011. This stent was launched in Japan and Canada in March 2012. Within four weeks of launch in Japan, the company successfully converted 75% of Promus volume to Promus Element, improving market share thereby from 32% to 42%. According to Zack stock analysts, the approval of Promus Element in US and Japan represents $200 million in additional annualized gross margin contribution at the end of 2012.

In May 2012 the FDA approved the Epic vascular stent, which is used to open blocked arteries in patients with iliac artery stenosis. The Innova self expanding bare metal stent was approved and launched in Europe. Innova is designed to treat peripheral vascular lesions in arteries above the knee.

The Watchman is a novel device for atrial fibrillation patients. The device is designed to capture any clots that may form in the Left Atrial Appendage of the heart, reducing the risk of stroke and potentially eliminating the need for long-term use of blood-thinning medications. The Watchman is already available in 30 countries, and in the US the company is planning to submit it for approval.

Another growth opportunity is in the Asia-Pacific region, where Boston Scientific's market share is less than 10 percent in most product markets, compared with more than 25 percent in the United States and Europe. Boston Scientific is gradually strengthening its presence in India and China where it recorded over 40% growth on a combined basis during the second quarter. The company plans to invest $150 million in China, potentially one of the world's largest medical devices markets, to build a local factory and training center.

Expectations for Boston Scientific's stock are currently very low. On Yahoo's Finance page of the 26 analysts who cover the company, 18 rate the stock a Hold, 2 mark it Underperform and only six rate the shares a Buy. Considering all that, it wouldn't take much for the shares to rise, assuming sales are improving.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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