On Boston Scientific Corp. (NYSE: BSX) with a price target of $42, lowered from $46. The shares have fallen year-to-date on coronavirus concerns, but we believe that the market’s reaction has been excessive given the essential nature of the company’s products and our expectation that demand for key medical devices will be delayed rather than lost. That said, we note that COVID cases are now rising across the country and expect the company to face additional pressure into at least the start of next year. At the same time, we expect the company to move past the crisis thanks to its strong portfolio and commitment to innovation, and project nearly 60% earnings growth in 2021. It also launched a spinal cord stimulator for the treatment of chronic pain and a new aortic valve system for patients with aortic stenosis. Based on these pipeline developments and management’s view that business activity has picked up in recent months, we believe that the current stock price undervalues the company’s prospects for recovery.
The beta on BSX is 1.03.
Boston Scientific has grown through innovation.
BSX recently provided several regulatory updates.
Beyond this, the company has also released several new products. On September 30, Boston Scientific launched its WaveWriter Alpha Spinal Cord Simulator (SCC) Systems in Europe. The portfolio of systems, which consists of four Bluetooth-enabled devices, provide relief for chronic pain by delivering pulses of minor electric current to the spinal cord. On September 28, the company initiated a controlled launch of the ACURATE neo2 Aortic Valve System in Europe. Compared to the previous version of the device, the new valve system has an expanded indication for patients with aortic stenosis, regardless of age or risk level.
Boston Scientific also released updates regarding reimbursement coverage for its products. On September 3, the U.S. Earlier, on July 1, the company’s single-use endoscopes, including the EXALT Model D Single-Use Duodenoscope, became recognized for transitional pass-through (TPT) payments.
Boston Scientific has also grown through its investments in other companies. On September 21, it announced an exclusive option to acquire Farapulse, Inc., a privately-held company developing a pulsed field ablation (PFA) system for the treatment of atrial fibrillation (AF) and other cardiac arrhythmias. While the Farapulse platform remains an investigational device, the company intends to initiate a pivotal IDE trial in the U.S. and is pursuing CE Mark approval in Europe.
EARNINGS & GROWTH ANALYSIS
Nevertheless, 3Q sales showed a marked improvement from net sales of $2.0 billion in 2Q20 as procedural volumes rose.
Cardiovascular (38% of 3Q sales), which includes Interventional Cardiology and Peripheral Interventions; MedSurg (31%), which includes Urology and Pelvic Health and Endoscopy; and Rhythm and Neuro (28%), which consists of Cardiac Rhythm Management, Electrophysiology, and Neuromodulation. The company also generated about 3% of its revenue from specialty pharmaceuticals, which it acquired as part of the BTG acquisition.
In 3Q20, organic sales fell 10% in Cardiovascular, to $1.0 billion; 2% in MedSurg, to $825 million; and 4% in Rhythm and Neuro, to $757 million. Cardiovascular sales were impacted by a 17% decline in Interventional Cardiology, partially offset by 2% growth in Peripheral Interventions. MedSurg was impacted by a 3% decline in Endoscopy and a 50-basis-point decline in Urology and Pelvic Health. The decline in Rhythm and Neuro sales was driven by an 8% decline in Electrophysiology, a 4% decline in Cardiac Rhythm Management, and a 3% decline in Neuromodulation. The company’s Specialty Pharma business generated $74 million of revenue in 3Q20, up 11% on an organic basis. By geographic region on an operational basis, 3Q revenue fell 4% in the U.S. to $1.50 billion, 3% in EMEA to $540 million, 4% in APAC to $472 million, and 17% in Latin America and Canada to $77 million.
While management typically provides guidance with its quarterly results, it did not provide an update on its third-quarter earnings call. Nevertheless, CFO Daniel Brennan said that the company is ‘aimed to grow’ in the fourth quarter, while noting COVID-19-related caveats. Management expects to provide 2021 guidance in February.
We expect demand to recover strongly next year as more patients return to doctors’ offices and other medical facilities.
MANAGEMENT & RISKS
The Chairman and CEO of Boston Scientific is Michael F. Mahoney. He has been CEO since November 2012 and chairman since May 2016. He previously held senior positions in Johnson & Johnson’s Medical Devices and Diagnostics division. The CFO is Daniel J. Brennan.
Investors in BSX shares face risks. The devices market is competitive. BSX’s cardiac rhythm management products face competition from industry leader Medtronic and from the St. Jude Medical business now owned by Abbott. Its coronary stents also face challenges from Abbott and Medtronic.
Boston Scientific also faces regulatory and technological risks. The company is developing new products to fill its product pipeline, which is also benefiting from acquisitions. However, these products must complete clinical trials and clear regulatory hurdles before reaching the market.
We note that product pricing and customer demand depend on the reimbursement policies set by government agencies and managed care companies. Governments in Europe and Japan, in particular, have imposed significant price cuts on medical devices.
The company has roughly 36,000 full-time employees.
As such, we believe that the current price offers investors a favorable entry point.
On November 3 at midday, BUY-rated BSX traded at $35.46, up $0.91.