STJ ST. Jude Medical, Inc.

Boston Scientific (BSX) is scheduled to release its third quarter fiscal 2011 earnings on Thursday, October 20, 2011 before the market opens. The company is expected to report EPS of 8 cents on revenue of $1.908 billion for the quarter, according to the Zacks Consensus Estimate. 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.

Previous Quarter Highlights

Boston Scientific reported an adjusted (other than amortization expense) EPS of 12 cents during the second quarter of fiscal 2011, 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.

The company also announced a restructuring program to increase productivity through zero-based budgeting and Emerging Market Initiative. In addition, Boston Scientific announced a $1 billion share repurchase program.

Boston Scientific also updated its guidance for fiscal 2011. The company 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.

Agreement of Analysts

Estimate revision trends among the analysts for the second quarter have been insignificant. Over the last 30 days, out of 22 analysts covering the stock, only 1 lowered the estimate for the quarter with none moving in the opposite direction. The analysts have adopted a cautious stance on the company given the issues witnessed by the core businesses and the current economic uncertainties.

The Cardiac Rhythm Management (CRM) market in the US, which declined in high single digits during the most recent quarter, continues to be the primary area of concern. This segment has been affected by physician reaction to a study result published by the Journal of the American Medical Association regarding evidence-based guidelines for ICD implants, US Department of Justice’s investigation into hospitals' ICD implants and the ongoing physician alignment to hospitals and competitive pricing pressures.

However, the company has adopted a restructuring program to strengthen its operational effectiveness, increase competitiveness and support new investments. This program is expected to reduce annual pre-tax operating expenses by $225–$275 million exiting 2013, a part of which will be invested in the business to drive growth ahead. About $155–$210 million (of which $5–$10 million should be non-cash) of pre-tax charges will be incurred by the company due to this program, with $10 million forecast for the third quarter.

Having established a strong foothold in the US and Europe, Boston Scientific is looking at establishing its presence in the emerging markets. With only 3–4% of market share in India, Boston Scientific is aiming for a bigger pie on the back of Promus Element and Taxus Element launches in February this year. The company also launched Promus Element in China this week. We expect an update from the company regarding its emerging market initiatives.

Magnitude of Estimate Revisions

For the third quarter, estimates have remained unchanged at 8 cents over the last 7 and 30 days. For fiscal 2011 as well, the consensus estimate remained static at 45 cents per share over the past 1 month.

Our Recommendation

Boston Scientific continues to focus on strategic initiatives to drive growth and profitability. Moreover, the company is working on strengthening its portfolio and targeting suitable acquisitions in areas of unmet medical needs. The restructuring initiatives undertaken should also lead to improvement in the bottom line. The stock retains a Zacks # 2 Rank (Buy) in the short term.

However, we continue to remain concerned about its core business where the company is witnessing significant pricing pressure and loss of market share. Besides, economic uncertainty is impacting procedure volume. The company also faces stiff competition from players such as Medtronic (MDT) and St Jude Medical (STJ). Longer term, we have a Neutral recommendation on the stock, in line with both its peers.

 
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