Earnings Preview: Boston Scientific

Boston Scientific (BSX) is scheduled to release its third quarter fiscal 2010 earnings on October 19, 2010 after the market close. The company is expected to report EPS and revenue of 6 cents and $1.91 billion, respectively, during the quarter, according to the Zacks Consensus Estimate.

Previous Quarter Highlights

Boston Scientific reported an adjusted EPS (excluding goodwill impairment-related credits, restructuring-related charges and amortization expense) of 6 cents for the second quarter of fiscal 2010, which surpassed the Zacks Consensus Estimate of 3 cents. However, earnings were lower than the 13 cents reported in the year-ago quarter. Net sales declined 7% year over year to $1.93 billion, primarily due to the cardiac rhythm management (CRM) ship hold and product recalls in the first quarter of 2010.

Sales from the Cardiovascular group declined by 9% ($823 million) with a 13% decline in CRM sales ($527 million). However, CRM has recovered from the first quarter’s product recall hangover attributable to its exceptional sales execution team.

Furthermore, Boston Scientific’s Endoscopy and Women’s Health businesses recorded annualized growth of 8% and 4% to $265 million and $120 million, respectively. However, sales of the Neurovascular segment declined 5% to $82 million, while Neuromodulation sales remained unchanged at $72 million.

Along with the second quarter results, Boston Scientific also updated its outlook for 2010. For fiscal 2010, the company lowered the high end of its net sales guidance range to $7.6 – $7.9 billion (from $7.6 – $8.0 billion). However, the company raised its adjusted EPS guidance range to 54 – 62 cents (from 50 – 60 cents).

For the third-quarter 2010, Boston Scientific expects net sales and adjusted EPS in the range of $1.85–$1.92 billion and 10–13 cents, respectively.

Agreement of Analysts

Over the last 30 days, none of the analysts have made any revisions to estimates. Moreover, in the fourth quarter, 1 analyst increased estimates in the last 7 days and 30 days. Moreover, Boston Scientific has witnessed a lowering of estimate by 3 analysts in the last 30 days, and 1 analyst in the last 7 days. The Zacks Consensus Estimate for the fourth quarter and fiscal 2010 is 10 cents and 31 cents, respectively.

As witnessed during the second quarter, sales from Coronary stent (accounting for 22% of total sales) declined 12.8% driven by decline in sales of both drug eluting stents (11.8%) and bare metal stents (23.3%).

Further, the pricing pressures led to a 400 basis points decline in the global drug eluting stents (DES) market share to 38% from the year-ago quarter. Concerns related to these challenges intensified during the second quarter due to the weakening Euro. In addition, the continuous mix shift from high margin Taxus to lower margin Promus poses a challenge for the company’s overall market share. Thus, this quarter is crucial for the company with respect to its DES market share.

Moreover, we are concerned about the Cardiac Rhythm Management (CRM) segment that has been facing the cardiac resynchronization therapy defibrillators (CRT-Ds) and implantable cardioverter defibrillator (ICDs) ship hold issues since the first quarter. Although the resumption of CRT-Ds and ICDs sales in the second quarter helped the company to prevent erosion of its topline and market share, we remain skeptical about the company’s performance given the loss of market share to the competitors like St. Jude (STJ) and Medtronic (MDT) in the ICD market. Consequently, more visibility is expected on the company’s regaining of its competitive edge in its CRM business.

Magnitude of Estimate Revisions

For the third quarter, there has not been any revision in estimates while overall, estimates for the fourth quarter increased by 1 cent to the current level of 10 cents per share in the last 90 days. For fiscal 2010, estimates have increased from 28 cents to 31 cents per share.

Surprise

Going by past trends, we expect Boston Scientific to exceed estimates. The company missed expectations in only one of the previous quarters and has a positive four-quarter average of 38.02%. This means that on an average, Boston Scientific has topped the Zacks Consensus Estimate by 38.02% over the last four quarters.

Our Recommendation

We believe Boston Scientific should be able to retain its growth momentum, as its products are primarily life sustaining in nature, which provides a hedge against any economic downturn. The company remains the leader in the medical devices industry through its increased focus on strategic activities.

The company intends to reposition its business for future growth by expanding its product portfolio, selectively reinvesting in the business and concentrating more on non-DES and non-CRM areas. It has a strong product pipeline, which when launched would enable it to expand its foothold worldwide. So far, Boston Scientific has made significant progress through new product launches across all its segments and with the recent acquisition of Asthmatx.

Moreover, the resolution of the warning letters also bodes well for its top-line growth. However, although the company is taking initiatives to recover from the whole ICD ship hold issue, we remain cautious, given the time-frame required to recapture its share from the competitors. We currently have a Neutral recommendation on the stock.

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