Boston Scientific Remains Neutral

Recently, we reiterated our Neutral recommendation on Boston Scientific Corporation ( BSX - Analyst Report ) with a target price of $7.25.

Boston Scientific reported an adjusted EPS of 15 cents beating the Zacks Consensus Estimate of 4 cents and the year-ago quarter’s 9 cents. The reported quarter witnessed a $759 million ($530 million after tax) gain on the sale of the Neurovascular business to Stryker Corporation ( SYK - Analyst Report ) . Moreover, having witnessed a reduction in the estimated size of the US CRM market, the company recorded a $723 million of goodwill impairment charge associated with its US CRM business unit during the quarter.

Revenues of $1.925 billion declined 2% year over year and surpassed the Zacks Consensus Estimate of $1.898 billion. However, excluding the impact of foreign currency and sales from divested business, net sales dropped 1%.

In the past few months, Boston Scientific undertook some of its ‘priority growth initiatives’ that complements its CRV model. The acquisition of Sadra Medical and Atritech played key roles in the realignment of portfolio targeted towards structural heart therapy and atrial fibrillation, respectively.

In May 2011, the company launched Energen and Punctua CRT-Ds and ICDs in Europe and other overseas markets. The launch of these products in the US is expected in late 2011 or early 2012. Moreover, launch of the next generation Ingenio wireless pacemaker is expected in the second half of 2011. We believe that these launches will strengthen Boston Scientific’s position in the CRM market.

Having established a strong foothold in the US and Europe, Boston Scientific is looking at establishing its presence in the emerging and under-penetrated markets of Brazil, India and China, which offer plenty of growth potential. The company plans to invest $30-$40 million in these regions through 2011. Furthermore, the company has strengthened its sales force in India and China and has added 100 representatives during the quarter in these two countries alone.

Pricing pressure in the US and Europe has been an issue for the past few quarters. Additional challenges concerning the company are softness in procedural volume, delays in new products and competitive product launches. The weak economy impacted the elective procedures leading to the decline in procedural volumes in non-stent interventional cardiology and Electrophysiology businesses.

While Boston Scientific made significant achievements under the leadership of Ray Elliott, there are various unresolved issues. As a result, his decision to retire will give rise to some uncertainty. Moreover, the competitive landscape is tough with the presence of St. Jude Medical ( STJ - Analyst Report ) and Medtronic ( MDT - Analyst Report ) .