Boston Scientific Corporation (BSX) reported an EPS of 1 cent during the first quarter of fiscal 2011 compared to a loss of $ 1.05 per share in the year-ago period. However, the reported quarter witnessed a $ 759 million ($ 530 million after tax) gain, recognized on the sale of the Neurovascular business to Stryker Corporation (SYK). Moreover, having witnessed, a reduction in the estimated size of the US Cardiac Rhythm Management (CRM) market, the company recorded a $ 723 million of goodwill impairment charge associated with its US CRM business unit during the quarter. After considering these and some other adjustments (other than amortization expense), the adjusted EPS came in at 15 cents beating the Zacks Consensus Estimate of 4 cents and the year-ago quarter’s 9 cents.
Revenues of $ 1.925 billion during the quarter surpassed the Zacks Consensus Estimate of $ 1.898 billion. However, compared to the first quarter of 2010, sales declined 2%. However, excluding the impact of foreign currency and sales from divested business, net sales dropped 1% year over year.
Despite a decline in revenues, Boston Scientific was able to improve its bottom line (on an adjusted basis) due to a 100 basis points improvement in gross margin to 67.2%, helped by a 4.8% reduction in cost of products sold. Moreover, adjusted operating margin improved 360 basis points year over year to 15.7% driven by lower selling, general and administrative (down 5.1% to $ 596 million), and research and development expenses (down 16.2% to $ 212 million). A 19.4% decline in interest expenses to $ 75 million, partially offset by a 1.4% rise in outstanding shares also contributed to the improvement in earnings. The decline in interest expenses was due to reduction in long-term debt to $ 4.7 billion from $ 4.9 billion at the end of December 2010.
Segment contribution
Boston Scientific derives maximum contribution from Cardiovascular, which recorded a 5% year-over-year decline in sales to $ 811 million. While sales from Interventional Cardiology declined 8% to $ 635 million, Peripheral Interventions increased 7% to $ 176 million. Global sales of coronary stent system (within Interventional Cardiology) at $ 409 million declined 7.9% driven by lower sales of both drug-eluting stents (DES, 6.9% to $ 379 million) and bare-metal stents (18.9% to $ 30 million). It is encouraging to note that the company maintained its leadership position in the global DES market with 36% share and 46% in the US market.
The next biggest contributor to Boston Scientific’s top line, CRM, recorded a 4% increase in sales to $ 559 million. A 6.9% rise in defibrillators sales to $ 417 million coupled with a 4% decline in sales of pacemakers to $ 142 million contributed to the overall increase. However, the year-ago period included a $ 72 million negative impact due to a ship hold of defibrillators and associated product removal actions.
Other segments of the company – Electrophysiology, Endoscopy, Urology/Women’s health and Neuromodulation recorded sales of $ 37 million (down 3% year over year), $ 287 million (up 10%), $ 120 million (up 6%) and $ 77 million (up 14%), respectively.
Guidance
Boston Scientific also updated its guidance for fiscal 2011. The company now expects revenue and adjusted EPS in the range of $ 7.6−$ 7.9 billion (previous guidance of $ 7.5−$ 7.9 billion) and 34−44 cents (26-36 cents), respectively. The Zacks Consensus Estimate for revenue and adjusted EPS stand at $ 7.7 billion and 31 cents, respectively. The revenue guidance now assumes a $ 212 million negative impact from the divestment of Neurovascular business. The recently announced acquisitions are expected to dilute the bottom line by 3-4 cents per share and the divestment of business by 5 cents.
For the second quarter of fiscal 2011, Boston Scientific expects to report adjusted EPS of 7-10 cents on revenue of $ 1.92−$ 2 billion. The Zacks Consensus Estimate of 7 cents is at the lower end of the guidance.
Recommendation
Boston Scientific continues to focus on strategic initiatives to drive growth and profitability. Recent acquisitions made by the company along with promising new technologies are expected to boost the company’s pipeline. However, we continue to remain concerned with its core business where Boston is witnessing significant pricing pressure. Moreover, economic uncertainty is impacting procedure volume.
We are currently ‘Neutral’ on the stock.
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