Boston Scientific (BSX) released its earnings yesterday, highlighting a 7% decline in revenues, on a reported basis. The sales figure of $1.735 billion represented a decline of 5% on constant currency, excluding the neurovascular divestiture. However, on an adjusted basis, EPS stood at $0.60 owing to factors such as cost control and gross margin improvements. The figure was also in line with the consensus, which too was within the guidance provided by the company, in the range of $0.14-$0.17. Adjusted OCF stood at $295 million, and some of the cash was allocated to buying back its shares, which the management believes are currently undervalued in the market; a belief that will continue to influence the management's capital allocation strategy.
Difficult conditions in the company's heart-rhythm and stent market contributed to the decline. Due to the weak forecasted demand, the company booked $809 million in a noncash goodwill impairment charge. The management expressed the view that it expects to see an improvement in the market, but also warned that the change would occur later in the future, and would be much weaker than initially forecasted.
At the start of the month, we highlighted in an article the importance of the approval of BSX's unique defibrillator, which the company got a hold of with the acquisition of Cameron Health. The defibrillator is different in the sense that its wires are implanted subcutaneously (under the skin) rather than being directly attached to the heart. According to the agreement of the acquisition, BSX is required to pay $150 million upon the approval of the product, followed by further payments contingent upon certain sales targets.
The system has been only approved for patients who do not require pacemakers or pacing therapy. In addition, the FDA also requires that the company conduct a five-year post-marketing study to determine the applicability of the device for both men and women, and its safety. The launch of the product will be phased, and the management expects to earn significant cash flows starting in 2016. As of now, 1400+ systems have been implanted the world over. The management rightly believes the technology is strategically important to the CRM business, and the new device (S-ICD) will provide the base to expand into the current ICD market.
A research report mentions that the cardiac defibrillator market will touch $12.5 billion by 2017. ICDs are popular in Europe, and the under-penetrated market in China and India provide opportunities for companies to expand their operations. Backed by the potential of these markets, BSX plans to spend $150 million in a span of five years to deepen its commercial outreach in China.
St. Jude Medical Inc (STJ)
Medtronic Inc (MDT)
Previously, we have expressed the fact that the stock was fairly valued at the moment. The decline in revenues in the third quarter and the overall weak outlook for its core product do not make this stock a buy. We recommend that investors avoid this stock at the moment. Analyst mean price estimate is $6.