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BSX Beats Y/Y Earnings, Guides Low

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Boston Scientific (BSX - Free Report) reported adjusted earnings per share (after considering certain adjustments other than amortization expense) (“EPS”) of 10 cents in the first quarter of 2013, a penny ahead of the year-ago adjusted EPS. Adjusted EPS in the reported quarter remained at the high end of the company’s guidance range of 7–10 cents. However, considering the amortized expenses adjustments, the quarter’s adjusted EPS came in at 16 cents, beating the year-ago adjusted EPS of 15 cents. The Zacks Consensus Estimate for the reported quarter has been pegged at 16 cents.

Revenues declined 6% year over year (down 4% at constant exchange rate or CER, excluding divested business) to $1.761 billion during the first quarter of 2013, missing the Zacks Consensus Estimate of $1.787 billion. However, reported revenues remained well in line with the company provided guidance range of $1.740−$1.815 billion. The company also presented an encouraging performance in the BRIC (Brazil, Russia, Indiaand China)nations with 29% (35% at CER) sales growth during the quarter.

Segment Analysis

Effective Jan 1, 2013, Boston Scientific made some changes in its reporting segments in order to reorganize its business from geographic regions to fully operationalized global business units.  As a result, the company currently has three new global reportable segments consisting of Cardiovascular, Rhythm Management and MedSurg.

Boston Scientific derives maximum revenues from Cardiovascular, which comprises Interventional Cardiology and Peripheral Interventions. Sales at these sub-segments were a respective $505 million (down 14% year over year at CER) and $191 million (up 3% at CER), during the quarter.

Global sales of coronary stent system (within Interventional Cardiology) were $310 million, down 19.9% due to a disappointing performance from drug-eluting stents (“DES”) that declined 19.5% to $292 million and bare-metal stents that plunged 25% to $18 million.

The next biggest contributor to Boston Scientific’s top line is Rhythm Management,which includes Cardiac Rhythm Management(CRM) and Electrophysiology. This segment also continued to disappoint with a 4% decline during the reported quarter to $520 million. Worldwide CRM revenues remained at $501 million, with a 4.6% drop in sales. Sales from pacemakers and defibrillators both declined 3.8% to $128 million and 4.9% to $350 million, respectively.

Over the recent past the company has been targeting new product launches to revive the sales of the beleaguered Interventional Cardiology and CRM segments. However, the dismal performance of these segments during the reported quarter proved beyond doubt that these measures have not been enough to ride over the challenges currently at play.

Other segments like Endoscopy, Urology/Women’s Health and Neuromodulation (coming under the MedSurg broader group) recorded sales of $313 million (up 5%), $119 million (flat year over year) and $89 million (up 6%), respectively.


The company recorded a 100 basis point (bps) year-over-year rise in gross margin to 67.2%. Adjusted operating margin expanded 65 bps to 17.4% in the quarter, based on a 4.2% decline in selling, general and administrative expenses to $631 million, a 5.1% drop in research and development expenses to $204 million and a 14.5% decline in royalty expense to $41 million.

Balance Sheet

Boston Scientific exited the fiscal with cash and cash equivalents of $268 million, up from $207 million at the end of fiscal 2012 with long-term debt of $4.25 billion. The company generated operating cash flow of $163 million and repurchased 13 million shares during the quarter under the existing share repurchase program.


Boston Scientific provided its second-quarter guidance and updated its fiscal 2013 outlook. For the second quarter, the company expects to report adjusted EPS of 14–17 cents on revenues of $1.740−$1.800 billion. The current Zacks Consensus Estimate for EPS of 16 cents is in line with the outlook, although the same for revenues stands at $1.805 billion, which is beyond the company’s guidance.

For full year 2013, the company lowered its revenue guidance to the band of $6.950 to $7.150 billion (earlier band being $7.168−$7.243 billion) with adjusted EPS in the range of 65−70 cents (64−70 cents). The Zacks Consensus Estimate for revenues stands at $7.170 billion, while the same for EPS is at 68 cents. While the revenues estimate was beyond the company’s guidance range, EPS estimate remained within the same.

Our Take

Boston Scientific posted dismal first-quarter 2013 results based on challenging economic conditions, competitive environment, pressure on core segments and a larger-than-expected currency headwind. Despite several initiatives undertaken by the company to revive its top line, we remain cautious as its core segments, implantable cardioverter defibrillator and DES (contributing 35% of sales) continue witnessing several headwinds.

The US defibrillator market remains an overhang for Boston Scientific and its peers. The DES business in the U.S. has been witnessing challenges due to pricing pressure, lower procedural volume, lower penetration rates and share losses from the launch of Medtronic's Resolute Integrity stent. However, to revive its top line, Boston Scientific is focusing on strategic initiatives to drive growth and profitability. These include restructuring initiatives, strengthening its portfolio, targeting suitable acquisitions in areas of unmet medical needs and focus on emerging markets.

Currently, Boston Scientific retains a Zacks Rank #3 (Hold). Medical products companies such as Cyberonics Inc. , Nuvasive Inc. (NUVA - Free Report) and Health Net Inc. , which carry a Zacks Rank #1 (Strong Buy) are worth considering.

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