Boston Scientific (BSX) reported adjusted earnings per share (after considering certain adjustments other than amortization expense) (“EPS”) of 12 cents in the second quarter of 2013, a penny ahead of the year-ago adjusted EPS.
However, considering the amortized expense adjustments, the quarter’s adjusted EPS came in at 18 cents, beating the year-ago adjusted EPS of 17 cents. This exceeds the company's adjusted EPS guidance range of 14–17 cents. The Zacks Consensus Estimate for the reported quarter was 16 cents.
Revenues declined 1% year over year (up 2% at constant exchange rate or CER, excluding divested business) to $1.809 billion during the second quarter of 2013. However, it exceeded the Zacks Consensus Estimate of $1.779 billion as well as the company provided guidance range of $1.740−$1.800 billion. The company also presented an encouraging performance in the BRIC (Brazil, Russia, India and China) nations with 29% (same at CER) sales growth during the quarter.
Segment Analysis
Boston Scientific currently has three new global reportable segments comprising Cardiovascular, Rhythm Management and MedSurg.
The company generates maximum revenues from Cardiovascular, which comprises Interventional Cardiology and Peripheral Interventions. Sales at these sub-segments were a respective $520 million (down 3% year over year at CER) and $199 million (up 5% at CER), during the quarter.
Global sales of coronary stent system (within Interventional Cardiology) were $304 million, down 10.6% due to a disappointing performance from drug-eluting stents (“DES”) that declined 9.7% to $287 million and bare-metal stents that plunged 22.7% to $17 million.
The next biggest contributor to Boston Scientific’s top line is Rhythm Management, which includes Cardiac Rhythm Management (CRM) and Electrophysiology. This segment also continued to disappoint with a 2% decline during the reported quarter to $511 million. Worldwide CRM revenues remained at $475 million, with a 2.7% drop in sales. Sales from pacemakers remained flat year over year, while defibrillators declined 3.7% to $342 million.
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 have not been enough to counter the current challenges.
Other segments like Endoscopy, Urology/Women’s Health and Neuromodulation (coming under the MedSurg broader group) recorded sales of $325 million (up 8% at CER), $124 million (up 1%) and $111 million (up 21%), respectively.
Margins
Gross margin grew 232 basis points (bps) year over year to 70.7%. Adjusted operating margin expanded 58 bps to 19.2% in the quarter. During the reported quarter, selling, general and administrative expenses grew selling 2% to $661 million, research and development expenses increased 4.7% to $223 million and royalty expense declined 2.1% to $41 million.
Balance Sheet
Boston Scientific exited the quarter with cash and cash equivalents of $530 million, up from $207 million at the end of fiscal 2012 and had long-term debt of $4.25 billion. The company generated operating cash flow of $396 million and repurchased 12.5 million shares during the quarter under the existing share repurchase program.
Guidance
Boston Scientific provided its third-quarter guidance and updated its fiscal 2013 outlook. For the third quarter, the company expects to report adjusted EPS of 14–16 cents on revenues of $1.700−$1.860 billion. The current Zacks Consensus Estimate for EPS of 16 cents is in line with the outlook, although the same for revenues stands beyond the company’s guidance at $1.715 billion.
For full year 2013, the company increased its revenue guidance to the band of $7.050 to $7.170 billion (earlier $6.950 to $7.150 billion) with adjusted EPS in the range of 67−71 cents (65−70 cents previously). The Zacks Consensus Estimate for revenues stands at $7.052 billion, while EPS is at 67 cents. While the revenue estimate was within the company’s guidance range, EPS estimate remained at the lower end.
Our Take
After several dismal quarters, Boston Scientific managed to beat estimates in the second quarter of 2013. However, challenging economic conditions, competitive environment, pressure on core segments and currency fluctuations remain major headwinds.
Despite several initiatives undertaken by the company to revive its top line, we remain cautious as its core segments, implantable cardioverter defibrillator and DES (contributing 35% of sales) continue to face challenges.
The US defibrillator market remains an overhang for Boston Scientific and its peers. The DES business in the U.S. has been witnessing challenges due to pricing pressure, lower procedural volume, lower penetration rates and share losses from the launch of Medtronic's (MDT) Resolute Integrity stent.
However, to revive its top line, Boston Scientific is focusing on strategic initiatives to drive growth and profitability. These include restructuring initiatives, strengthening of its portfolio, targeting suitable acquisitions in areas of unmet medical needs and focus on emerging markets.
Currently, Boston Scientific retains a Zacks Rank #4 (Sell). Medical products companies such as HealthNet, Inc. (HNT) and Hospira Inc. (HSP), which carry a Zacks Rank #1 (Strong Buy), are worth considering.
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