Boston Scientific (BSX) reported adjusted earnings per share (after considering certain one-time adjustments other than amortization expense) of 13 cents in the fourth quarter of 2013, 2 cents ahead of the year-ago adjusted EPS figure.
However, considering amortized expense adjustments, the quarter’s adjusted EPS came in at 21 cents, 16.7% ahead of the year-ago adjusted EPS. This also exceeded the company's adjusted EPS guidance range of 18–20 cents and the Zacks Consensus Estimate of 19 cents.
However, without these adjustments, the company reported net income of $108 million or 8 cents per share in the quarter, an 80% or 100% jump from the year-ago net income of $60 million or 4 cents a share, respectively.
For the full year, adjusted EPS (including amortized expense adjustments) reached 73 cents, up 10.6% from the prior-year figure surpassing the Zacks Consensus Estimate by 2 cents.
Revenues in the fourth quarter registered a 1% increase year over year (up 5% at constant exchange rate or CER, excluding divested business) to $1.838 billion. The figure exceeded the Zacks Consensus Estimate of $1.829 billion, as well as the company-provided guidance range of $1.780−$1.830 billion. For the full year, the company reported revenues of $7.143 billion, representing 1% decline on reported basis (up 1% at CER).
Segment Analysis
Boston Scientific currently has three global reportable segments comprising Cardiovascular, Rhythm Management and MedSurg.
The company generates maximum revenues from Cardiovascular, which comprises Interventional Cardiology and Peripheral Interventions. Sales in these sub-segments were $500 million (down 3% year over year at CER) and $205 million (up 7% at CER), respectively, during the quarter.
Global sales of coronary stent system (within Interventional Cardiology) were $287 million, down 13.8%. The downfall was owing to a disappointing performance from drug-eluting stents (DES) that declined 12.8% to $272 million, and bare-metal stents that plunged 28.5% to $15 million.
The next biggest contributor to Boston Scientific’s top line is Rhythm Management, which includes Cardiac Rhythm Management (CRM) and Electrophysiology. CRM continued to remain sluggish with 2% revenue growth to $468 million on a year-over-year basis (up 3% at CER).
After several quarters of drag, worldwide sales from pacemakers (within CRM) showed improvement of 6.3% to $135 million, while defibrillators edged up 0.9% to $333 million. Electrophysiology sales improved 33% year over year (up 35% at CER) to $50 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. Although, CRM is gradually coming back to growth, the dismal performance of Interventional Cardiology during the reported quarter proved beyond doubt that the measures have not been enough to counter the ongoing challenges.
Other segments like Endoscopy, Urology/Women’s Health and Neuromodulation (coming under the MedSurg broader group) recorded sales of $343 million (up 8% at CER), $132 million (up 5%) and $138 million (up 33%), respectively.
Margins
Gross margin grew 182 basis points (bps) year over year to 69.8%. Adjusted operating margin however contracted 88 bps to 17.4% in the quarter. During the reported quarter, selling, general and administrative expenses increased 13.3% to $724 million, research and development expenses dropped 9.6% to $216 million and royalty expense was slashed by 14.3% to $24 million.
Balance Sheet
Boston Scientific exited the year 2013 with cash and cash equivalents of $217 million, up from $207 million at the end of fiscal 2012, and had long-term debt of $4.24 billion. The company generated operating cash flow of $1.078 billion and repurchased 51.4 million shares during 2013 under the existing share repurchase program.
Guidance
Boston Scientific provided its full year 2014 guidance.The company expects to report adjusted EPS of 75–80 cents (considering all one-time items including amortized expense) on revenues of $7.380–$7.500 billion. The current Zacks Consensus Estimate for EPS of 78 cents and revenues of $7.400 billion coincide with the company’s outlook.
For the first quarter of 2014, adjusted earnings are expected to remain in the band of 16 cents–18 cents per share while the company predicts revenues within $1.755–$1.805 billion.The Zacks Consensus Estimate for EPS stands at 20 cents, while that for revenues is $1.799 billion.
Our Take
Despite challenging economic conditions, competitive environment, pressure on core segments and a larger-than-expected currency headwind, Boston Scientific managed to beat estimates in the fourth quarter of 2013 and exited the year on a positive note.
We are also looking forward to the recently completed acquisition of electrophysiology business of C.R. Bard, Inc. (BCR). We believe this to add further traction to Boston Scientific’s growing electrophysiology business in the coming months. Also, pacing business is gradually coming back to the growth trajectory, which is an encouraging sign.
However, for quite a long time, the US defibrillator and stent markets have remained as major overhangs. Despite several initiatives undertaken by the company to revive its top line, we remain cautious as its core segments – implantable cardioverter defibrillator and DES are still taking a toll on the numbers.
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 Inc.'s (MDT) Resolute Integrity stent.
To revive its top line, Boston Scientific is focusing on strategic initiatives to drive growth and profitability. These include the recently announced restructuring initiatives for 2014, strengthening of its portfolio, targeting suitable acquisitions in areas of unmet medical needs, and focus on emerging markets. However, near-term visibility of these initiatives remains a matter of question.
Currently, Boston Scientific retains a Zacks Rank #4 (Sell). Among the better-ranked medical product companies, Stryker Corp. (SYK) which carries a Zacks Rank #2 (Buy), is worth considering.
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