Boston Scientific Corporation

Transcription

1 March 06, 2015 Boston Scientific Corporation Current Recommendation Prior Recommendation Outperform Date of Last Change 10/16/2011 Current Price (03/05/15) $16.97 Target Price $18.00 NEUTRAL SUMMARY (BSX-NYSE) Boston Scientific s fourth-quarter 2014 adjusted EPS of $0.22 exceeded both the year-ago figure and the Zacks Consensus Estimate by 4.8% but coincided with the upper end of the company's adjusted EPS guidance range. Revenues went up 7% at CER to $1.887 billion. Although, the figure remained shy of the Zacks Consensus Estimate of $1.904 billion, it remained within the company s guidance range. We are encouraged by the improvement at the core segments in the fourth quarter. The solid guidance for 2015 indicates that this growth is sustainable. We are also optimistic about the recent update on the company s growth objective. The company is focusing on strategic initiatives like portfolio expansion, restructuring initiatives, focus on emerging markets and share repurchases. Yet, currency headwinds and fierce competition in this sector continue to pose challenges. Hence, we are Neutral on the stock. SUMMARY DATA 52-Week High $ Week Low $11.37 One-Year Return (%) Beta 1.04 Average Daily Volume (sh) 13,709,542 Shares Outstanding (mil) 1,331 Market Capitalization ($mil) $22,579 Short Interest Ratio (days) 2.13 Institutional Ownership (%) 90 Insider Ownership (%) 1 Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) -2.6 Earnings Per Share (%) 12.2 Dividend (%) N/A using TTM EPS 20.2 using 2015 Estimate 19.1 using 2016 Estimate 16.6 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Average, Type of Stock Large-Blend Industry Med Products Zacks Industry Rank * 99 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,761 A 1,809 A 1,735 A 1,838 A 7,143 A ,774 A 1,873 A 1,846 A 1,887 A 7,380 A ,781 E 1,865 E 1,852 E 1,949 E 7,445 E ,813 E Earnings Per Share Estimates (EPS is operating earnings excluding amortization expenses, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.16 A $0.18 A $0.17 A $0.21 A $0.72 A 2014 $0.20 A $0.21 A $0.20 A $0.22 A $0.84 A 2015 $0.20 E $0.22 E $0.22 E $0.25 E $0.89 E 2016 $1.02 E Note: Quarterly figures may not add up to the annual figure due to rounding off. Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved North Canal Street, Chicago IL 60606

2 OVERVIEW Headquartered in Natick, MA and founded in 1979, Boston Scientific Corporation (BSX) is a manufacturer of medical devices and products used in various interventional medical specialties worldwide. The company has adopted the organic as well as inorganic routes for success. Effective Jan 1, 2013, Boston Scientific made some changes in its reporting segments in order to reorganize its business from geographic and regional to fully operationalized global business units. As a result, the company currently has three global reportable segments consisting of Cardiovascular, Rhythm Management and MedSurg. While Cardiovascular includes Interventional Cardiology (IC) and Peripheral Interventions (PI), Rhythm Management consists of Cardiac Rhythm Management (CRM) and Electrophysiology (EP). The MedSurg group has three sub segments, viz. Endoscopy, Urology/Women s Health and Neuromodulation. In 2014, Boston Scientific derived 28% of its sales from Interventional Cardiology, 26% from CRM, 18% from Endoscopy business, 12% from PI business, 7% from Urology and Women s Health business, 6% from Neuromodulation and 3% from EP business. The company is one of the leading players in the interventional cardiology market with its coronary stent product offerings. Boston Scientific markets a broad portfolio of internally-developed and selfmanufactured drug eluting stents including the Promus PREMIER, Promus Element and Promus Element Plus everolimus-eluting stents. In addition, in Europe it markets the SYNERGY Everolimus-Eluting Platinum Chromium Coronary Stent System featuring an ultra-thin abluminal (outer) bioabsorbable polymer coating. The company also markets balloon catheters, rotational atherectomy systems, guide wires, guide catheters, embolic protection devices, and diagnostic catheters used in percutaneous transluminal coronary angioplasty (PTCA) procedures, as well as intravascular ultrasound (IVUS) imaging systems. Within the CRM segment, the company deals with implantable devices that monitor the heart and deliver electricity to treat cardiac abnormalities. The portfolio includes implantable cardioverter defibrillator (ICD) systems, cardiac resynchronization therapy defibrillator (CRT-D) systems and cardiac resynchronization therapy pacemaker (CRT-P) systems. REASONS TO BUY Progressing on restructuring initiatives: In late 2013, Boston Scientific s board of directors approved a restructuring initiative for This restructuring plan aims to address financial pressures in a changing global marketplace, strengthen operational effectiveness and efficiency further, and support new growth investments. Major actions under this plan include continued implementation of the company s ongoing Plant Network Optimization (PNO) strategy, consistent focus on driving operational efficiencies and ongoing business, and commercial model changes among others. According to Boston Scientific, the PNO strategy will simplify its manufacturing plant structure by transferring certain production lines among facilities. These activities are expected to be substantially completed by the end of Boston Scientific expects this restructuring plan to reduce gross annual pre-tax operating expenses by $175 $225 million by the end of This restructuring program is also expected to result in total pre-tax charges of approximately $250 $300 million. This program is aimed at generating savings, a part of which is to be reinvested in the company s strategic growth initiatives. Benefits from this program should strengthen the business in the coming years. Despite the negative impact from the Medtech tax, the company is likely to benefit from this growth-driven initiative over the long term. Equity Research BSX Page 2

3 Notably, the 2011 restructuring plan which was expanded further in Jan 2013, had reduced gross annual pre-tax operating expenses by approximately $360 million at the end of A substantial portion of the total program savings were reinvested in targeted areas for future growth, including strategic growth initiatives and emerging markets. Key activities under this program were substantially completed by the end of Encouraging near-mid to longer-term growth plan: In 2013, Boston Scientific provided a detailed update on its medium-term ( ) and long-term ( ) growth plan. This remains as an extension of the company s 2011 plans to restructure, which is intended to further strengthen its operational effectiveness and efficiencies and support new investments. According to the company, the challenging economic scenario leading to notable change in the end market essentially required an up-gradation from its earlier growth objectives provided in 2010 which had been considered by the company as too aggressive. Accordingly, the company mentioned that it foresees a stabilization of the IC and CRM markets leading to slight sales improvement (low single digit growth) over the next 3 years. Management also provided an update on its view for the medium term ( ) and long term ( ). The company expects growth rate to improve from 1% growth in 2013 to midsingle digit (more than 2% in 2015 and 4% in 2017) on the back of improvements in the CRM and interventional cardiology markets, flourishing emerging markets and the expected US launch of key platforms like Synergy. The company also stated that between 2015 and 2017, markets for severe asthma, hypertension, transcatheter valves, left atrial appendage, and deep brain stimulation will generate encouraging double digit sales growth. Moreover, the emerging markets, especially the BRIC nations are expected to show accelerated growth on the back of almost 2.5 fold increase in sales by We remain upbeat about the fact that, despite several headwinds in the recent times, Boston Scientific still expects to maintain its track record of consistent results and exceed its medium-term and long-term goals. Focus on emerging markets: Against the backdrop of flattening or declining sales growth in developed markets like the U.S. and Europe, Boston Scientific is gradually strengthening its presence in the emerging markets with countries like Brazil, Russia, India and China (BRIC) recording over 10% growth on a combined basis during In the year, business from the emerging markets contributed 10% of the company s total sales with a robust 17% growth rate, ahead of the company s target of reaching 15% of sales in 2017 from 8% in An important part of the company s growth strategy is to continue pursuing development opportunities outside the U.S. by expanding global presence, inclusive of the emerging markets. In April 2014, the company expanded the launch of its S-ICD System into parts of Asia. With 2 million people in this Equity Research BSX Page 3

4 region at the risk of sudden cardiac arrest (SCA) but unprotected, this latest launch is expected to capture solid foothold in Asia. Earlier, Boston Scientific created a new Asia-Pacific regional organization to further increase capabilities and strengthen its position in this fast growing region. The company plans to invest approximately $150 million in China, one of the world s fastest growing and largest medical devices markets, over the next 5 years to build a local manufacturing operation to cater to Chinese market needs and develop a training center for healthcare providers. Moreover, headcount will be increased to more than 1,200 employees by 2016 from the current level of 200. According to the company, PCI volume in the US market is likely to be in the low-single digits, and is likely to be offset by robust growth in the international markets, especially in the emerging ones. Boston Scientific remains optimistic about its core cardiology segment which it gradually stabilizing with growing performance in BRIC nations. The cardiology capacity in China is expected to double by In India, the business is projected to grow more than 15% a year. Encouraged by value-adding acquisitions: We are impressed with the company s recent acquisitions that have brought in several products (though many are under development) with immense potential, which in turn, should help boost the top line in the long term. In Sep 2014, to strengthen the company s foothold in the global peripheral interventions market, Boston Scientific acquired the Interventional Division of German healthcare major Bayer AG for $415 million. The acquisition will enhance Boston Scientific s ability to offer physicians and healthcare systems a more complete portfolio of solutions to treat challenging vascular conditions. The company expects the transaction to be accretive by approximately $0.01 in 2015 and increasingly accretive thereafter. Prior to that, in May 2014, the company acquired IoGyn, Inc., a pre-commercial stage company. According to Boston Scientific, with this acquisition, Symphion System will work in combination with Boston Scientific s Genesys HTA System for abnormal uterine bleeding, to create a compelling set of gynecologic surgery products. In Nov 2013, Boston Scientific had acquired Bard EP, the electrophysiology business of C.R. Bard. The deal has been treated as a step forward toward strengthening the company s foothold in the $2.5 billion global electrophysiology market. With the market growing at a rapid pace, Boston Scientific is confident about the strategy to expand its electrophysiology business. In the reported quarter, this acquisition contributed 135 basis points to the company s growth. Going by the huge potential of the renal denervation market, Boston Scientific acquired Vessix Vascular, which has developed the percutaneous radiofrequency balloon catheter technology for treatment of hypertension. This segment is expected to be a multi-billion dollar market by Moreover, after strengthening its CRM portfolio with the acquisition of Cameron Health, Boston Scientific purchased Rhythmia Medical in Massachusetts in order to strengthen its foothold in the rapidly growing electrophysiology ablation business. REASONS TO SELL Exposed to currency movement: With Boston Scientific recording 47% of its sales from the international market, it is exposed to currency fluctuation. Unfavorable currency movement has been a major dampener during the quarter, as also reflected in the earnings of other important MedTech players. As a result, the company s revenues are expected to fluctuate with movements in the foreign exchange rates. Competitive landscape: The presence of a large number of players has made the medical devices market highly competitive. The company participates in several markets, including Cardiovascular, CRM, Endosurgery and Neuromodulation, where it faces competition from large, well-capitalized companies such as Johnson & Johnson, St. Jude, Medtronic, Stryker, Smith & Nephew and Edwards Lifesciences, besides several other smaller companies. Equity Research BSX Page 4

5 RECENT NEWS Boston Scientific Earnings, in Line; Revenue Beat, View Up Oct 22, 2014 Boston Scientific reported adjusted earnings per share (EPS) (after considering certain one-time adjustments other than amortization expense) of $0.15 in the fourth quarter of 2014, 15.4% ahead of the year-ago adjusted number. However, considering amortized expense adjustments, the quarter s adjusted EPS came in at $0.22, 4.8% ahead of both the year-ago adjusted number and the Zacks Consensus Estimate. The figure coincides with the upper end of the company's adjusted EPS guidance range of $0.20 $0.22. Without these adjustments, the company reported net income of $87 million or EPS of $0.06 in the quarter, down from the year-ago net income of $108 million or EPS of $0.08 cents, respectively. For full year 2014, Boston Scientific reported adjusted earnings (considering certain one-time adjustments including amortization expense) of $0.84 cents per share, reflecting a year-over-year improvement of 15.1%. Full year EPS also beat the Zacks Consensus Estimate by a penny and exceeded the company s earlier projected band of $0.81 $0.83. Revenues in Detail Revenues in the fourth quarter registered a 2.7% increase year over year (7% growth at constant exchange rate or CER, excluding divested business) at $1.887 billion. The figure, although shy of the Zacks Consensus Estimate of $1.904 billion, remained within the company s guidance range of $1.875 $1.925 million. For full year 2014, the company reported revenues of $7.380 billion, up 3.3% year over year (operational revenue growth of 6%) and comfortably ahead of the Zacks Consensus Estimate of $2.305 billion. The results were well within the company s guidance of $7.370 $7.420 billion. Segment Analysis Boston Scientific currently has three global reportable segments comprising Cardiovascular, Rhythm Management and MedSurg. The company generates maximum revenues from Cardiovascular, which comprises Interventional Cardiology and Peripheral Interventions. Sales in these sub-segments were $523 million (up 10% year over year at CER) and $222 million (up 10%), respectively, during the fourth quarter. Global sales of coronary stent system (within Interventional Cardiology) were $303 million, up 5.6%. The improvement in drug-eluting stents (DES) performance that increased 6.9% to $291 million was partially offset by the poor bare-metal stents performance that plunged 20% to $12 million. The next biggest contributor to Boston Scientific s top line was Rhythm Management, which includes Cardiac Rhythm Management (CRM) and Electrophysiology. CRM reflected sales improvement of 3% to $468 million at CER. Worldwide sales from pacemakers (within CRM) dropped 4.4% to $129 million, while defibrillators increased 1.8% to $339 million. Electrophysiology sales surged 23% year over year at CER to $59 million. Over the recent past, the company has been targeting vital product launches to revive the sales of the beleaguered Interventional Cardiology and CRM segments. The improved performance in these core Equity Research BSX Page 5

6 segments in the reported quarter, proved beyond doubt that the measures undertaken are working effectively to counter the ongoing challenges. In the quarter, the improvement in Interventional Cardiology was driven by continued leadership of the Promus PREMIER Stent system in the U.S. and solid share gains in Japan. Other segments like Endoscopy, Urology/Women s Health and Neuromodulation (coming under the MedSurg broader group) recorded sales of $340 million (up 5% at CER), $140 million (up 9%) and $134 million (down 2%), respectively. Margins Gross margin was up 57 basis points (bps) year over year to 70.4%. Adjusted operating margin expanded 77 bps to 18.1% in the quarter. During the reported quarter, selling, general and administrative expenses increased 4% to $753 million while research and development expenses dropped 3.7% to $208 million. Royalty expense increased 4.2% to $25 million. Balance Sheet Boston Scientific exited the year with cash and cash equivalents of $587 million, a substantial 170.5% rise from $217 million at the end of fiscal 2013, and had long-term debt of $3.86 billion. The company generated operating cash flow of $1.269 billion in Guidance During the earnings call, Boston Scientific provided its full year 2015 guidance. The company expects 2015 adjusted EPS (considering all one-time items including amortized expense) in the range of $0.88 $0.92. The current Zacks Consensus Estimate stands at $0.90, coinciding with the midpoint of the guidance range. Revenues, on the other hand, are expected to remain in the range of $7.300 $7.500 billion (growth of 3% to 6% on an operational basis). For the first quarter of 2015, adjusted earnings are expected in the band of $0.19 $0.21 per share on revenues of $1.740 $1.800 billion. The Zacks Consensus Estimate for EPS stands at $0.21, while that for revenues is $1.831 billion. VALUATION Amid challenging economic conditions, a competitive environment, and currency headwinds, Boston Scientific posted a mixed fourth-quarter 2014, beating our estimate on the earnings front while lagging the same with respect to revenues. However, we are impressed that barring Neuromodulation, the company has managed to post an impressive performance with balanced growth across the rest of its segments. Moreover, the guidance for 2015 also helps us to rely on the sustainability of this growth performance. We are also optimistic about the recent update on the company s growth objectives. In 2014, Boston Scientific had strengthened its core businesses and invested in new technologies and global markets, which contributed to the solid results across its businesses and regions. Additionally, the company also showed an improvement in its margins and delivered double-digit adjusted EPS growth. Boston Scientific is currently looking forward to year 2015 wherein it expects to introduce more innovative medical technologies and solutions. The company has a strong pipeline of products under development, the launch of which should drive the top line. We are encouraged by the focus on emerging markets, especially India and China. Boston Equity Research BSX Page 6

7 Scientific plans to invest approximately $150 million in China over the next 5 years to build a local manufacturing operation. We thus reiterate our Neutral recommendation on the stock with a target price of $ Boston Scientific s current trailing 12-month earnings multiple is 20.2 compared to 18.3 for the S&P 500. Over the last five years, the shares have traded in a range of 8.7X to 20.4X trailing 12-month earnings. Our price target is based on 20.2X our 2015 EPS estimate of $0.89. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Boston Scientific Corporation (BSX) Industry Average N/M N/M N/M N/M 37.9 S&P Owens & Minor Inc. (OMI) Terumo Corporation (TRUMY) Stryker Corp. (SYK) St. Jude Medical (STJ) TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Boston Scientific Corporation (BSX) Industry Average N/M S&P Equity Research BSX Page 7

8 Earnings Surprise and Estimate Revision History Equity Research BSX Page 8

9 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of BSX. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1031 companies covered: Outperform %, Neutral %, Underperform 6.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst Copy Editor Content Ed. Lead Analyst QCA Reasons for Report Urmimala Biswas Anindita Sinha Urmimala Biswas Aniruddha Ganguly Earnings Equity Research BSX Page 9