Summary:
We remian optimistic about Boston Scientific's recently introduced global restructure
plan, the execution of which will result in fulfillment of its margin leverage goals and
help Boston Scientific produce low-to-mid-teens EPS growth, ahead of the industry
average. Boston Scientific is currently leaving no stone unturned to strengthen its core
businesses and invest in new technologies and global markets, which accounted for
the sales upside across all its geographies in the first quarter. Moreover, we are
encouraged with the company gaining a number of approvals for its products. The
company’s Urology business is also gaining traction from the AMS urology portfolio
acquisition. However, apart from a difficult foreign exchange scenario, we are
concerned with the disappointing performance of the company’s core CRM segment
with worldwide pacemakers and defibrillator sales declining over the past few
quarters.
Reasons to Buy:
Progress on Restructuring Initiatives: Boston Scientific’s restructuring plan is aimed
at addressing financial pressures in a changing global marketplace, strengthening
operational effectiveness and efficiency, and supporting new growth investments. Major
actions under this plan include continued implementation of the company’s ongoing
Plant Network Optimization (PNO) strategy (aimed at simplifying our manufacturing
plant structure, reducing manufacturing costs and improving gross margins), consistent
focus on driving operational efficiencies and ongoing business, and commercial model
changes among others. According to Boston Scientific, the PNO strategy has simplified
its manufacturing plant structure by shifting certain production lines among facilities.
The full benefit of PNO, which has already been completed, should start to reflect in the
company’s Rhythm Management adjusted operating margin through the second half of 2016.
This restructuring program is also expected to result in total pre-tax charges of approximately $255–$270 million. The program is
aimed at generating savings, a part of which will be reinvested in the company’s strategic growth initiatives. Benefits from this
program should strengthen the business over the coming years. The company looks to benefit from this growth-driven initiative over
the long term.
Encouraging Near to Longer-Term Growth Plan: In May 2015, Boston Scientific announced its latest near-to-longer term growth
plan. As an extension to the company’s 2014 restructuring strategy, the current plan aims at driving mid-single-digit organic
revenue growth and consistent adjusted operating margin expansion. This in turn will lead to double-digit adjusted EPS growth at
constant exchange rate or CER. The detailed growth plan includes meaningful innovation; global collaboration; continued focus on
driving operational efficiencies; and ongoing business and commercial model changes. The company is also focusing on expanding
globally and creating emerging market scale on new R&D capabilities, local partnerships and branding. It estimates emerging
market contribution to increase from 10% in 2014 to 15% by 2017. Other activities under the plan involve rationalizing organizational
reporting structures to streamline various functions, eliminate bureaucracy, increase productivity and better align resources to
business strategies and marketplace dynamics.
Focus on Emerging Markets: An important part of Boston Scientific’s growth strategy is to continue pursuing development
opportunities outside the U.S. by expanding global presence, inclusive of the emerging markets. Against the backdrop of flattening
or declining sales growth in developed markets like the U.S. and Europe, Boston Scientific is gradually strengthening its presence in
the emerging markets, in countries like Brazil, Russia, India and China (BRIC). In first-quarter 2016, business from the emerging
markets registered a robust 21% organic growth rate, ahead of the company’s target of reaching 15% of sales by 2017 from 8% in
2013. This encouraging performance was driven by 19% growth in China in the reported quarter.
The company is gaining strong ground in India as well. It is currently targeting about 10 emerging markets for additional emphasis.
Boston Scientific hopes to sustain its strong overall international performance taking into consideration several key new product
launches that are in the early stages of their rollout. The company is also optimistic about its core cardiology segment which is
gradually stabilizing with growth in the BRIC nations. The cardiology capacity in China is expected to double by 2017. In India,
business is projected to grow more than 15% annually.
Mayo Clinic Deal-to Add Value: In a major step to boost its entire medical device wing, Boston Scientific has collaborated with
Mayo Clinic, a renowned nonprofit organization that works on medical research and education. Taking into consideration the latest
temporary freezing of the 2.3% medical device tax, which had earlier taken a toll on the entire medical device sector discouraging
research and development, this partnership is expected to prove important for Boston Scientific. The collaboration agreement states
that Boston Scientific engineers and Mayo Clinic physicians have already been working together to develop new medical
technologies in areas such as interventional cardiology, heart rhythm management, endoscopy, neuromodulation, urology and pelvic
health. Both Boston Scientific and Mayo Clinic are optimistic about this alliance, which they hope should not suffer any longer owing
to investment issues. The amount earned from the temporary tax repeal can now be channelized for reinvestment in this
collaboration. We accordingly expect to see a massive productivity boost for Boston Scientific in the coming quarters.
Impressive Value-adding Acquisitions: We are impressed with Boston Scientific’s recent acquisitions that have added several
products (though many are under development) with immense potential. This, in turn, should help boost the top line in the long term.
In Nov 2015, Boston Scientific acquired the interventional radiology portfolio of CeloNova Biosciences, a San Antonio-based
developer of endovascular and interventional cardiology technologies. According to the company, CeleNova is a synergistic tuck-in
acquisition focused on the treatment of liver cancer via localized delivery of chemotherapeutic agents. Earlier in Aug 2015, the
company acquired the American Medical Systems (AMS) urology portfolio, including the Men's Health and Prostate Health
businesses of Endo International. Other recent acquisitions include Xlumena buyout which should help enhance Boston Scientific’s
position in the field of interventional endoscopic ultrasound or EUS therapeutics; the Interventional Division of German healthcare
major Bayer AG and IoGyn, Inc. – a pre-commercial stage company.
High Urology Potential with AMS' Urology Suit: Boston Scientific believes the recently completed acquisition of the AMS urology
portfolio will nearly double the size of its urology business to $1 billion. This is expected to bring in significant synergies and solid
growth prospects through portfolio innovation and international market expansion. As part of Boston Scientific's Urology and
Women's Health, this business should strengthen the company's leadership in the urology device category globally while also
providing strong shareholder returns. Urology represents attractive global market potential of $4 billion with large unmet patient
needs and considerable international expansion opportunities. We believe the acquisition presents significant potential to the
company to capitalize on this opportunity.
Risks:
CRM Continues to Remain a Drag: Sluggish CRM sales over the recent past continue to weigh on Boston Scientific's results.
The first quarter remains no exception to that with disappointing performance in the company’s worldwide pacemakers and
defibrillator sales.
We note that, at the beginning of 2015, Boston Scientific predicted a slowdown in worldwide CRM sales for the entire year due to
replacement cycle headwinds and competitive launches in the U.S. The company earlier anticipated softness in U.S. CRM sales
to continue even in the first quarter of 2016. Although the company is currently expecting a rebound in its CRM performance in
the second quarter and second half 2016, we remain on the sidelines based on the challenges the company is still facing in this
business, especially in the U.S.
Exposure to Currency Movement: With Boston Scientific recording 47% of its sales from the international market, it remains
highly exposed to currency fluctuations. Unfavorable currency movements have been a major dampener during the fourth quarter,
as in the case of other important MedTech players too. With the trend likely to linger, the company’s revenues are expected to be
hit by fluctuations in foreign exchange rates, going forward. In the first quarter of 2015, foreign exchange headwind impacted the
company’s adjusted earnings by $0.10 a share. Considering this impact, for 2016, Boston Scientific expects currency headwind
to the tune of approximately $100 million on revenues or $0.05?$0.06 per share on adjusted earnings relative to the year-ago
quarter.
Legal Matters Hampering Growth: Boston Scientific recorded net litigation-related charges of $456 million in 2015. This relates
to the increase in the company’s litigation reserve for a recent appellate court ruling in Maryland in the Mirowski case. The
remainder relates to a combination of increases in our transvaginal surgical mesh product liability reserves and other
adjustments. Such legal costs, when accrued over time, may substantially impact the company’s operating results and cash
flows.
Competitive Landscape: The presence of a large number of players has made the medical devices market highly competitive.
The company participates in several markets, including Cardiovascular, CRM, Endosurgery and Neuromodulation, where it faces
competition from large, well-capitalized companies such as Johnson & Johnson, St. Jude, Medtronic, Stryker, Smith & Nephew
and Edwards Lifesciences, apart from several other smaller companies.
