Deteriorating market conditions and weak earnings took a toll on Boston Scientific's (BSX) stock last year. While the stock has appreciated more than 10% in the last couple of months to near our $6 price estimate, it lost these gains after the Q3 earnings announcement. With the stock declining 10% from our price estimate, we find it prudent to revisit our core business assumptions and see what factors could trigger downside to our current price estimate.
One area in particular where the company can lose value is if it fails to limit the decline in its market share in interventional cardiology and cardiac rhythm management (CRM) segments. In the scenario below, we see downside of 15% from our current price estimate.
1. Market share in Interventional Cardiology: This represents Boston Scientific’s revenues from the interventional cardiology division as a percentage of total interventional cardiology market. Interventional cardiology involves the use of catheters to remove clogging from arteries and helps in restoring blood flow throughout the body.
2. Market share in Cardiac Rhythm Management: This represents Boston Scientific’s revenues from its cardiac rhythm management division as a percentage of total cardiac rhythm management market. The CRM equipment helps in the treatment of abnormal heart conditions through the use of pacemakers and implantable cardioverter defibrillators (ICDs).
15% Downside Scenario to Our Estimate -- $5 Trefis Price Estimate
1. Higher Decline in Market Share in Interventional Cardiology (-10%):
Boston Scientific enjoys a market leadership position primarily because of its self-manufactured coronary stent systems, which are small tubes used to treat coronary artery diseases. However, its market share declined from 33% in 2008 to 23% in 2011 as revenues declined due to significant competition while overall market size increased. As a result of pricing pressure following healthcare reforms and austerity drives across the globe and intense competition as well as some issues related to stent performance, we expect the company’s market share to decline to below 10% by the end of our forecast period. As the segment is the largest revenue contributor and constitutes more than 25% of our price estimate, even a small under-performance with respect to our expectations will have a big impact on the company’s valuation.
With the recent launch of Promus Element, an improved version of the drug eluting stent (DES) technology, and the exit of Johnson & Johnson (JNJ) from the DES market, we expect the company to limit the decline. Further, we expect the U.S. dollar to weaken as the economy improves.
If the company fails to turn these factors in its favor and the U.S. dollar continues to remain weak, it could see its market share declining at a steeper rate to 8% by the end of Trefis forecast period. This could translate to a downside of nearly 10% to our current price estimate of $6.
2. Higher Decline in Market Share in Cardiac Rhythm Management (-5%):
This 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 CRM declined from 25.4% in 2008 to around 12.7% primarily due to significant competition and lost share related to investigations by the U.S. Department of Justice. In 2011, Boston Scientific was sued by the U.S. Department of Justice as its subsidiary Guidant was found to be selling defective ICDs. This has had a negative impact on the company’s brand image and it is losing market share faster due to shrinking demand for its defibrillators. We forecast the company’s market share declining from above 12% currently to about 7% by the end of our forecast period as a result of potential issues related to the aforementioned lawsuit as well as intense competition.
We expect the acquisition of Cameron Health in 2011 and the launch of several improved products to help the company counteract these issues. But, if these factors fail to take pressure off the company and market share declines further to 6% by the end of Trefis forecast period, this will represent a 5% downside to our price estimate.
Combining both scenarios, a 10% downside from a higher decline in market share in interventional cardiology division and 5% downside from a higher decline in market share in cardiac rhythm management division, we arrive at 15% downside or a price estimate of close to $5 for Boston Scientific.
Disclosure: No positions.