Medical device maker Boston Scientific (BSX) has over 11 billion dollars in market cap. The company has always been more volatile and more controversial than average, but the chatter, rumors, and speculation on this company seem to be near-constant. The company seems to be at a key turning point, though, and the decisions the company makes today will likely determine whether Boston Scientific can once again be a major player in medical technology.
Aggressive Moves Brought Trouble Home To Roost
It is hard to believe that Boston Scientific was once a $40 stock, but it did in fact hit its all-time high ($45.81) in April of 2004. While the company rode a wave of acquisitions (SciMed, Target, Meadox, Schneider) and aggressive product introductions to the top, that same aggression sowed the seeds for major problems.
Not only did the company face several product recalls and some wrath from the FDA, it stretched itself much too far in buying Guidant. The company wrecked its balance sheet with debt and inherited a host of problems with the Guidant acquisition -- problems that have included FDA warnings (including a rather rare corporate warning letter), product holds, and generally disappointing results.
Much of this occurred under the roller-coaster reign of CEO Jim Tobin. Not all that long ago (2009), Boston Scientific announced a new CEO and the company now appears to have a plan underway to restore investor confidence and rebuild shareholder value. But the question remains whether the company will (or can) rebuild itself or whether it will choose to sell out to a larger rival.
Rebuild – Help May Be On The Way
If Boston Scientific is serious about rebuilding, there are some reasons for optimism. The company has lost share in major markets like drug-coated stents and cardiac rhythm management (CRM), but new products could help reverse the momentum.
The Promus Element holds the promise of not only recapturing share but boosting margins, as BSX will not have to split profits with Abbott (ABT). The success of the Promus Element likely hinges on results from the PLATINUM trial (scheduled to be released on April 4). Designed to show non-inferiority to the current Abbott Xience V stent, a strong result would be a major boost to the company's fortunes – perhaps to the tune of $200 million in profits. Assuming the data is good enough to support approval, it could hit the market in mid-2012 and the company also has an entirely new platform (the Synergy) in development behind that.
In the CRM business, BSX seems to have worked through the Guidant problems and is looking forward to a new platform launch and the hope of chipping away at Medtronic's (MDT) near-50% hold on the market. Obviously St. Jude (STJ) and Medtronic will have more than a little to say about the company's plans to grow its share in CRM (at their expense). Both St. Jude and Medtronic have product development efforts of their own, and St. Jude has been riding some momentum in this market for a while now.
In With The New
Beyond these drivers, investors can also look forward to a bevy of product introductions from previous acquisitions. The Asthmatx Altair bronchial theromplasty system, the Atritech Watchman left atrial appendage closure system, and the Intellect deep brain stimulation could all open new and potentially lucrative markets to the company – none of which are necessarily huge themselves, but meaningful in total.
Boston Scientific is also looking forward to the launch of Lotus (acquired in the deal for Sadra Medical) – a catheter-based heart valve replacement system. This has proven to be an exciting market. Edwards Lifesciences (EW) posted almost 10% revenue growth for 2010 in a year where growth was hard to find in med-tech – and more than three-quarters of that growth was due to the new Sapien transcather heart valve, even though it was only approved in Europe. With U.S. approval expected, analysts are already looking for several years of powerful revenue growth for Edwards on the strength of this product.
While Edwards will be first to market, and Medtronic is underway with a pivotal U.S. trial of its own, Boston Scientific may yet have an ace up its sleeve. Unlike the Sapien or Medtronic's CoreValve, the Lotus is fully repositionable and retrievable and that could be a big ease-of-use advantage that sways surgeons in BSX's favor.
Nothing Is Certain
Of course, there are no guarantees. Competition is fierce in med-tech and shows no signs of abating; if the Promus Element or Lotus cannot show demonstrable benefits, they will not go far. Even if Promus Element is approved and launched, upcoming new stent launches from Abbott (the Xience Prime), Johnson & Johnson (JNJ) (the Nevo), and Medtronic (the Endeavor Resolute) could whittle away the benefit. After all, Abbott currently has the most successful platform on the market (though Boston Scientific's combined share of Promus and Taxus is greater) and Johnson & Johnson has enjoyed the top spot in the past.
On top of all that, the markets themselves are changing. Pricing in the stent and CRM business has been under serious pressure and device companies can no longer charge whatever they like and expect it to stick. Elsewhere, clinical data is both boon and bane – data that showed negative outcomes for drug-coated stents severely hurt the market years ago (before rebounding), and there is a rising tide of negative data suggesting ICDs (a key part of CRM) are implanted too often.
Likewise, many companies have laid out pathways to reducing expenses but have found the actual process to be much more difficult in practice. So while it may be true that Boston Scientific has hundreds of millions to gain from better operating efficiency, that is easier said than done.
The Bottom Line
Boston Scientific spent many years alienating and antagonizing its shareholders, so the rampant rumors around the company may be a product of that frustration and desperation. Although investor frustration and impatience is understandable, and success for BSX is by no means a sure thing, investors may just want to hang on and see whether a combination of new product launches and better management can fix what has ailed this company for so long. If they succeed, there is no reason that this stock could not double in five years or less.
Part 2: The Case for Bowing Out
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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