Boston Scientific Surpasses - Analyst Blog

Boston Scientific (BSX) reported adjusted EPS of 12 cents, far ahead of the Zacks Consensus Estimate of 6 cents. However, earnings were flat on a year-over-year basis. Adjusted EPS includes intangible asset impairment charges, restructuring-related charges and discrete tax items, but excludes after-tax amortization expense.

Revenues in the reported quarter declined 5% year over year to $1.92 billion, including a 6% and 5% decline in domestic ($1.10 billion) and international sales ($0.81 billion), respectively. Revenues according to the Zacks Consensus Estimate were $1.91 billion. Defibrillators ship hold and product removal actions lowered the revenue growth rate by approximately 140 basis points or $28 million, as compared with the company's estimate of $44 million due to proper execution of the recovery plan.

The total Cardiovascular group sales declined 8% year over year to $781 million including a decline of 10% in Cardiac Rhythm Management (CRM) sales to $550 million. However, CRM is experiencing a recovery from the first quarter's product recall hangover with the help of a quality sales team.

Boston Scientific maintained its leadership in the drug eluting stents (DES) market with market share of 37%, which moved ahead of its nearest competitor by 8 percentage points higher and remained 4 percentage points lower than the year-go quarter. The company expects to retain its lead in the market going forward with its continuous focus on the only two DES platforms in the industry.

Boston Scientific's Endoscopy and Women's Health businesses recorded annualized growth of 4% and 6% to $269 million and $122 million, respectively. However, sales of the Neurovascular and Neuromodulation segment declined 8% ($79 million) and 9% ($79 million), respectively.

Operating expenses decreased to $1.04 billion in the reported quarter from $1.34 billion in the third quarter 2009. The decrease was due to the 4.7% and 10.8% decline in selling, general and administration expenses as well as research and development expenses at $634 million and $230 million, respectively. The decrease in expenses were also impacted by a 23.5% decline in royalty expenses ($39 million) due to strong Promus sales along with the royalty structure, which is responsible for the lower royalty rates once the targeted volume is attained.

Gross margins declined by 150 basis points to 68.1%. The margins were primarily affected by a shift in DES mix from Taxus to Promus, lower DES share and pricing pressures in both the US and Japan.

Boston Scientific exited the quarter with cash and cash equivalents of roughly $624 million as compared with $864 million at the end of December 31, 2009. The company's long-term debt balance stood at approximately $5.1 billion, down from $5.9 billion at the end of December 31, 2009.

Capital expenditures were $79 million in the reported quarter, as compared with $91 million in the year-ago quarter. Free cash flow was $205 million as compared with $393 million in the third quarter of 2009.

Outlook

For the fourth quarter of 2010, Boston Scientific expects net sales and adjusted EPS in the range of $1.93–$2.00 billion and 15–18 cents, respectively.  The Zacks Consensus earnings estimate is 10 cents for the fourth quarter.

Given the impact of the first three quarters of 2010, Boston Scientific estimates that the Defibrillators ship hold will have a negative impact of approximately $190 million for the full year 2010, compared with the previous estimate of $225 million. This implies $72 million in the first, $65 million in the second and $28 million in the third as well as $28 million in the fourth quarter.

For fiscal 2010, Boston Scientific increased the lower level of its revenue guidance. The company now expects sales and adjusted EPS of $7.7−$7.8 billion (previous guidance: $7.6−$7.9 billion) and 63–66 cents (54–62 cents), respectively.

During the quarter, Boston Scientific made significant progress through new product launches across all its segments, especially with the recent acquisition of Asthmatx -- a new arena of pulmonary devices opened up for Boston Scientific. Moreover, all of the warning letters associated with the quality issues, have been resolved.

Boston Scientific manufactures medical devices and products used in a broad range of interventional medical specialties. The company faces significant competition across its product portfolio. The primary competitors include Johnson & Johnson (JNJ), Medtronic Inc. (MDT), St. Jude Medical Inc. (STJ) and Abbott Laboratories (ABT) 

Presently, we are Neutral on Boston Scientific.