Boston Scientific (BSX) reported a net loss of $725 million or 52 cents per share in the third quarter of 2012, a disappointment from net income of $142 million or earnings per share (“EPS”) of 9 cents in the year-ago period.
This was mainly due to a goodwill impairment charge of $809 million or 58 cents per sharereflecting a reduction in the estimated size of the U.S. Cardiac Rhythm Management (“CRM”) market and related adjustments to the business, as well as other competitive factors, leading to lower projected U.S. CRM results. In the second quarter the company had recorded a goodwill impairment charge of $3.405 billion or $2.38 per share related to its Europe, Middle East and Africa (“EMEA”) reporting unit.
After considering certain adjustments (other than amortization expense), EPS in the reported quarter came in at 10 cents, missing the Zacks Consensus Estimate by a penny and flat year over year. However, the quarter’s adjusted EPS remains within the company’s guidance range of 8–11 cents.
The challenges rife in Boston Scientific’s core segments consisting of stents and defibrillators do not show any sign of abatement. Revenues declined 7% year over year (5% at constant exchange rate or CER, excluding divested business) to $1.735 billion during the third quarter of 2012, lagging the Zacks Consensus Estimate of $1.761 billion. Reported revenues were at the lower end of the company provided guidance range of $1.725−$1.825 billion..
While revenues derived from the domestic market declined 8% year over year to $907 million, international revenues dropped 6% to $796 million (down 1% at CER). Other than the 7% growth (12% at CER) in the Inter-Continental market ($219 million), Boston Scientific recorded a drop in revenues in both Japan (6% to $222 million; down 5% at CER) and EMEA (14% to $355 million; down 5% at CER).
Segment Analysis
Boston Scientific derives maximum revenues from Cardiovascular, which comprises Interventional Cardiology and Peripheral Interventions. Sales at these sub-segments were a respective $494 million (down 17% year over year at CER) and $189 million (up 7% at CER), during the quarter.
Global sales of coronary stent system (within Interventional Cardiology) at $304 million declined 24.4% due to a disappointing performance from both drug-eluting stents (“DES”) that declined 24.5% to $283 million and bare-metal stents that plunged 22.2% to $21 million.
The next biggest contributor to Boston Scientific’s top line, CRM, continued to disappoint with a 6% (at CER) drop in sales to $462 million during the quarter. Sales from pacemakers and defibrillators declined 5.6% to $135 million and 9.2% to $327 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 were not enough to ride over the challenges currently at play.
Other segments of the company, namely Electrophysiology, Endoscopy, Urology/Women’s Health and Neuromodulation, recorded sales of $35 million (unchanged at CER), $310 million (up 7%), $125 million (up 1%) and $88 million (up 5%), respectively.
Margins
The company recorded a 410 basis point (bps) year-over-year rise in gross margin to 67.8%. Operating margin expanded 350 bps to 19.5% in the quarter, based on a 6.4% decline in selling, general and administrative expenses; a 3.9% drop in research and development expenses to $220 million and a 19.4 % decline in royalty expense to $29 million.
Balance Sheet
Boston Scientific exited the quarter with cash and cash equivalents of $352 million, up from $267 million at the end of fiscal 2011 with long-term debt of $4.25 billion. The company generated operating cash flow of $271 million and repurchased 46 million shares during the quarter under the 2011 share repurchase program. The company also experienced a positive impact from the 8.6% decline in the share count as a result of the continuous share buyback program.
Guidance
For the fourth quarter of fiscal 2012, Boston Scientific expects to report adjusted EPS of 9–12 cents on revenue of $1.740−$1.815 billion. The current Zacks Consensus Estimate of 12 cents in EPS is in line with the upper end of the outlook and the consensus revenue estimate of $1.797 billion falls within the company’s guidance.
For the fiscal, the company lowered its revenue guidance to $7.168−$7.243 billion from the prior expectation of $7.2−$7.4 billion. On a GAAP basis, the company expects to report a loss of $2.89−$2.86 per share.
After adjusting for estimated impairment and other one-time charges, the EPS guidance has been narrowed to 40−43 cents compared to the earlier guidance of 38−44 cents.The Zacks Consensus Estimates for revenue stands at $7.263 billion, ahead of the guided range. The consensus EPS estimate remains at 43 cents, within the range provided.
Our Take
The headwinds currently at play for Boston Scientific’s CRM segment also had an adverse impact on its peer, St Jude Medical’s (STJ) third quarter performance that was reported yesterday.
The US defibrillator market remains an overhang for Boston Scientific and its peers, St Jude Medical and Medtronic (MDT). The DES business in the US 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 strengthening its portfolio, targeting suitable acquisitions in areas of unmet medical needs and focus on emerging markets. We are encouraged by the recent US approval of its subcutaneous implantable cardioverter defibrillator, the S-ICD system.
Boston Scientific plans to invest approximately $150 million in China, one of the world's fastest growing and largest medical devices markets, over the next 5 years to build a local manufacturing operation. This would cater to the Chinese market and help develop a training center for healthcare providers.
The company also recently announced the proposed acquisitions of Rhythmia Medical and BridgePoint Medical. While the former would strengthen the company's foothold in the electrophysiology ablation business, the latter would bring in a catheter-based system to treat coronary chronic total occlusions. We are impressed with Boston Scientific's recent acquisitions, which reflect its focus on new therapies to drive the top line.
Currently we have a Neutral recommendation on Boston Scientific. The stock retains a Zacks #3 Rank (Hold) in the short term.
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