STJ ST. Jude Medical, Inc.

Boston Scientific Corporation (BSX) reported an EPS of 10 cents during the second quarter of fiscal 2011 compared to 6 cents in the year-ago period. However, after considering certain adjustments (other than amortization expense), the adjusted EPS came in at 12 cents beating the Zacks Consensus Estimate of 8 cents and the year-ago quarter’s 6 cents.

Revenues increased 2.4% year over year to $1.975 billion during the quarter, surpassing the Zacks Consensus Estimate of $1.936 billion. However, excluding the impact of foreign currency and sales from divested businesses, net sales remained unchanged.

Boston Scientific’s second quarter guidance was an adjusted EPS of 7-10 cents on revenue of $1.92−$2 billion. While the company exceeded its EPS guidance range, revenue was on the higher side. Shares of the company were up by 5.37% in pre-market trading.

Segment contribution

Boston Scientific derives maximum contribution from Cardiovascular, which recorded a 2% year-over-year increase in sales to $841 million. This is really encouraging as this segment revenue had been declining over the past few quarters. While sales from Interventional Cardiology declined 1% to $652 million, Peripheral Interventions increased 14% to $189 million.

Global sales of coronary stent system (within Interventional Cardiology) at $428 million increased 1.4% driven by higher sales of drug-eluting stents (DES, up 2.8% to $400 million), partially offset by 15% decline in sales of bare-metal stents to $28 million.

Following the launch of Ion Paclitaxel-Eluting Platinum Chromium stent in the US, Boston Scientific increased its market share in the US to 50% (46% at the end of first quarter). The company maintained its leadership position in the global DES market with 36% share.

The next biggest contributor to Boston Scientific’s top line, Cardiac Rhythm Management (CRM), recorded a 3% increase in sales to $544 million. Higher sales of both defibrillators (up 3.7% to $393 million) and pacemakers (up 2% to $151 million) contributed to the overall increase.

Other segments of the company – Electrophysiology, Endoscopy, Urology/Women’s health and Neuromodulation recorded sales of $38 million (up 2% year over year), $298 million (up 12%), $127 million (up 6%) and $84 million (up 17%), respectively.

Restructuring initiatives

The company also announced a restructuring program to increase productivity through zero-based budgeting and Emerging Market Initiative. The program is expected to result in $225-$275 million of gross annual savings exiting 2013.

About 1,200-1,400 positions will be reduced globally (through employee attrition and targeted headcount reduction) as a part of this program and result in $155-$210 million of pre-tax charges.

As a part of its focus on emerging markets, Boston Scientific plans to invest another $150 million over the next five years to drive its growth in that region. This will include developing local manufacturing capabilities and a training center.

Moreover, the employee base in China is expected to increase to more than 1,200 from the current level of 200. During the reported quarter, the company received registration approval for its Promus Element stent in China and expects to launch it in the fourth quarter.

Balance Sheet

Boston Scientific exited the reported quarter with cash and cash equivalents of $154 million, down from $213 million at the end of fiscal 2010. It is encouraging to note that the company was able to reduce its debt level to $4.2 billion, consistent with the targeted capital structure, from $4.9 billion at the end of December 2010.

In addition, the company announced a $1 billion share repurchase program apart from its current buyback authorization of 37 million shares.

Guidance

Boston Scientific also updated its guidance for fiscal 2011. The company now expects revenue and adjusted EPS in the range of $7.675−$7.875 billion (previous guidance of $7.6−$7.9 billion) and 41−47 cents (34-44 cents), respectively.

The Zacks Consensus Estimate for revenue and adjusted EPS stand at $7.746 billion and 40 cents, respectively. The revenue guidance now assumes a $201 million ($212 million) negative impact from the divestment of Neurovascular business.

For the third quarter of fiscal 2011, Boston Scientific expects to report adjusted EPS of 6-9 cents on revenue of $1.87−$1.97 billion. The Zacks Consensus Estimate of 8 cents in EPS and $1.9 billion revenue is at the higher end of the guidance. The recently announced acquisitions are expected to dilute the bottom line by 1 cent per share and the divestment of Neurovascular business by the same magnitude.

Recommendation

Boston Scientific continues to focus on strategic initiatives to drive growth and profitability. The improvement in its core businesses during the reported quarter is encouraging.

Moreover, the restructuring and share buyback programs are expected to drive its bottom line further. However, the competitive landscape is tough with the presence of players such as Medtronic (MDT) and St Jude Medical (STJ).

We are currently Neutral on the stock.

 
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