BSX Incurs Loss, Hit by Charges - Analyst Blog

BostonScientific ( BSX ) reported a net loss of $3.4 billion or $2.39 per share in the second quarter of 2012, a disappointment from net income of $146 million or earnings per share ("EPS") of 10 cents in the year-ago period. This was primarily due to an estimated impairment charge of $3.405 billion or $2.38 per share related to the company's Europe, Middle East and Africa ("EMEA") reporting unit.

The segment paid the price for lower projected long-term growth rates due to macroeconomic factors and their impact on the European market.

In the first quarter of 2011, the company had recorded a goodwill impairment charge of $723 million associated with a reduction in the estimated size of the US Cardiac Rhythm Management ("CRM") market.

After considering certain adjustments (other than amortization expense), EPS in the reported quarter came in at 11 cents, in line with the Zacks Consensus Estimate and a penny below the year-ago quarter's adjusted EPS.

The challenges rife in Boston Scientific's core segments consisting of stents and defibrillators do not show any sign of abatement. Revenues declined 7% year over year (5% at constant exchange rate or CER) to $1.828 billion during the second quarter of 2012, lagging the Zacks Consensus Estimate of $1.884 billion. Excluding the impact of divested businesses and at CER, net sales dropped 4%.

Unfavorable currency movement has been a major dampener during the quarter, which also reflected in the earnings of other important MedTech players like Johnson & Johnson ( JNJ ), Zimmer Holdings ( ZMH ) and St Jude Medical ( STJ ), among others.

While revenues derived from the domestic market declined 9% year over year to $947 million, international revenues dropped 5% to $851 million (up 1% at CER). Other than the 11% growth (at CER) in the Inter-Continental market ($214 million), Boston Scientific recorded a drop in revenues in both Japan (2% to $235 million) and EMEA (2% to $402 million).

As per the guidance provided during first quarter results, Boston Scientific expected to report adjusted EPS of 8-11 cents on revenue of $1.85−$1.95 billion during the quarter. While the company met its EPS forecast, revenue missed the guidance.

Segment Analysis

Boston Scientific derives maximum revenues from Cardiovascular, which comprises Interventional Cardiology and Peripheral Interventions. Sales at these sub-segments were a respective $549 million (down 13% year over year at CER) and $196 million (up 7%), during the quarter.

Global sales of coronary stent system (within Interventional Cardiology) at $340 million declined 20.5% due to a disappointing performance from both drug-eluting stents ("DES") that declined 20.5% to $318 million and bare-metal stents that plunged 21.4% to $22 million.

The next biggest contributor to Boston Scientific's top line, CRM, continued to disappoint with an 8% (at CER) drop in sales to $488 million during the quarter. Sales from pacemakers and defibrillators declined 11.9% to $133 million and 9.7% to $355 million, respectively.

Over the recent past the company has been targeting new product launches to revive the sales of the beleaguered Cardiovascular and CRM segments. However, the dismal performance of these segments during the reported quarter proved beyond doubt that these measures were not enough to ride over the challenges currently at play.

Other segments of the company, namely Electrophysiology, Endoscopy, Urology/Women's Health and Neuromodulation, recorded sales of $37 million (unchanged at CER), $311 million (up 7%), $126 million (unchanged) and $91 million (up 10%), respectively.


The company recorded a 270 basis point (bps) year-over-year rise in gross margin to 67.9%. Operating margin nonetheless remained almost unchanged at 18.2% in the reported quarter, based on a 4.5% drop in research and development expenses to $213 million, a 7.7 % decline in royalty expense to $48 million while selling, general and administrative expenses remained almost flat at $648 million.

Balance Sheet

Boston Scientific exited the quarter with cash and cash equivalents of $371 million, up from $267 million at the end of fiscal 2011 with long-term debt of $4.2 billion. The company generated operating cash flow of $407 million and repurchased 18 million shares during the quarter under the 2011 share repurchase program. The company also experienced a positive impact from the 7.3% decline in the share count as a result of the continuous share buyback program.


For the third quarter of fiscal 2012, Boston Scientific expects to report adjusted EPS of 8-11 cents on revenue of $1.725−$1.825 billion. The current Zacks Consensus Estimate of 11 cents in EPS is in line with the outlook though the consensus revenue estimate of $1.830 billion exceeds the company's guidance.

For the fiscal, the company lowered its revenue guidance to $7.2−$7.4 billion from the prior expectation of $7.35−$7.65 billion. On a GAAP basis, the company expects to report a loss of $2.16−$2.09 per share.

After adjusting for estimated impairment and other one-time charges, the EPS guidance has been narrowed to 38−44 cents compared to the earlier guidance of 36−46 cents. The Zacks Consensus Estimates for revenue and adjusted EPS stand at $7.437 billion and 43 cents, respectively.

Our Take

The headwinds currently at play for Boston Scientific's CRM segment also had an adverse impact on its peer, St Jude Medical 's second quarter performance that was reported last week. Besides, economic uncertainty is continuing to affect procedure volume.

During the first quarter, the company had envisioned stability in the US defibrillator market and easing of pricing pressure in the DES market. However, we do not expect any significant improvement in the near term, reflected in the lowering of guidance by both Boston Scientific and St Jude Medical.

Accordingly, the company remains focused on strategic initiatives to drive growth and profitability. The US approval of Ingenio and Advantio pacemakers and Invive cardiac resynchronization therapy pacemakers should provide some cushion to the struggling device maker.

We are encouraged by the company's decision to acquire Cameron Health, which would bring in the unique subcutaneous implantable cardioverter defibrillator.

Longer term, we have a Neutral recommendation on Boston Scientific. The stock retains a Zacks #3 Rank (Hold) in the short term.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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