We maintain our Neutral rating on
Boston Scientific Corporation
) as the shares appear to be fairly valued. Headquartered in
Natick, Massachusetts, Boston Scientific is a leading player in the
field of medical devices.
Despite several initiatives undertaken by the company to revive
its flagging top line, we toe a more cautious line as the core
segments, ICDs and DES (contributing 40%), as per sales, continued
to witness several headwinds. The Cardiac Rhythm Management (
) market in the US has been impacted 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. The DES business in the US continues
to suffer pricing pressure, lower procedural volume and penetration
As a confidence booster, recent product launches should come to
the company's aid. We are encouraged by the US approval of Promus
Element Plus stent, which comes well ahead of the original
expectation of a mid-2012 approval. Promus Element represents $200
million in additional annualized gross margin contribution from the
US and Japan at the end of 2012. This is a part of the targeted
$650-$750 million opportunity for improvement in operating profit
over the next few years.
The success of Ion and Promus Element Plus in the US coupled
Johnson & Johnson
) announcement of exiting the DES business by the end of 2011 and
the expected launch of Promus Element in Japan should enable the
company to improve its DES market share. Moreover, we believe the
recent US approval of Energen and Punctua CRT-Ds and ICDs should
support the company's 2012 growth story.
Meanwhile, Boston Scientific has resorted to the restructuring
route to strengthen its operational effectiveness and efficiency,
increase competitiveness and support new investments. The program
is expected to reduce annual pre-tax operating expenses by
$225-$275 million exiting 2013 and a part of this saving will be
invested back in the business to drive growth going ahead. Although
benefits from these programs will not be accrued in 2011, these
steps should strengthen the company in the long term.
Moreover, having established a strong foothold in the US and
Europe, Boston Scientific is looking to consolidate its presence in
the emerging markets of Brazil, India and China. Sales in these
regions advance at a double-digit clip during the reported quarter.
With the recent launch of Promus Element in China and some
anticipated pricing approvals in India, contribution from these
regions is expected to rise further in 2012.
Based on investments made in sales representatives, dealers and
infrastructure, the company is well placed to increase its
single-digit market share in China and India. The combined DES
market in China and India is currently estimated at $700 million
growing at a 20% rate.
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