Saturday, August 11, 2012

BSX F2Q12 Earnings 6/27/12 - (Ryan Kennedy)

     Boston Scientific (BSX) released second quarter earnings on July 26th for the period ended June 30th. The company reported sales of $1.82bn and adjusted EPS of $0.17. Revenues fell 4% from Q2 2011 on a constant currency basis, driven by eroding sales in the Interventional Cardiology and Cardiac Rhythm Management segments, but somewhat tempered by growth in the Neuromodulation, Endoscopy, and Peripheral Intervention business units. Despite adjusted EPS at the high-end of management’s guidance, the stock traded down throughout the day on weakening sales in the business’ two core segments.
     Excluding divested businesses, the firm reported revenues of $1.8bn compared to $1.9bn a year ago. Revenues from Interventional Cardiology, the firm’s stent business, saw the largest drop of 13%, from $652mm to $549mm. The Cardiac Rhythm Management unit, the firm’s ICD and pacemaker unit and also the firm’s second largest division, also fell 8%, from $544mm to $488mm. The CRM division has slowed on decreased procedural volumes, driven by a study in the Journal of the American Medical Association and subsequent Department of Justice investigations into non-evidence based ICD implants. Despite disappointing performance from the business’ two largest segments, BSX continues to have positive growth in its smaller units, which are continually becoming more significant parts of the business. The Neuromodulation unit, which produces implantable electronic devices used to control chronic pain, continued its strong performance, growing from $84mm to $91mm, or 10% on a constant currency basis. The Endoscopy and Peripheral Interventions units also saw moderate growth of 7%, from $298mm to $311mm and $189mm to $196mm, respectively.

     BSX continues to make strides in profitability. The firm increased gross margin by 322 bps, from 65% to 68%, as the firm continues its transition from the lower-margin Promus stent to the higher-margin Promus Element. After removing one-time items, EBITDA margin increased 22 bps despite increases in SG&A and R&D as percentages of sales, primarily driven by the increase in gross margin. On an absolute basis, SG&A grew by $6mm, while R&D fell by $10mm and EBITDA dropped $23mm. Boston Scientific continues to pay down debt and reduce interest expense, which has historically weighed on earnings since the firm took on $6.5bn in debt to acquire Guidant in 2006. The firm reported interest expense of $64mm compared to $73mm a year ago. After removing a $3.4bn non-cash goodwill impairment charge associated with the EMEA unit, BSX reported net income of $242mm or $0.17 a share. On a GAAP basis, the company reported a net loss of $3.4bn or $2.39 per share.
     Going forward, we are bullish on Boston Scientific. The company has been trading based on revenue growth in the CRM and Interventional Cardiology units, but there is more than meets the eye. Despite contractions in the two main business segments, the company continues to have significant growth in the Neuromodulation and Endoscopy units, which are now becoming sizable portions of the company, and should begin to have a larger effect on the stock price. The company continues to make strides in profitability and unload the debt levels that have suppressed the stock over the past six years. Overall the company is stronger and more financially sound, but needs a catalyst in the IC or CRM units to reawaken the stock and allow investors to focus on improved financials. The PROMUS Element, which has been brought to market but is still in its infancy, may be the catalyst needed to bolster Interventional Cardiology revenues. Aside from the Element, there are very positive new developments in the Cardiac Rhythm Management unit, with the $150mm acquisition of Cameron Health and its subcutaneous S-ICD device. The S-ICD device has the potential to be a $750mm market, and BSX is the only company that has such a device. Considering the firm’s improved health, its strong operating cash flow generation of $407mm, and catalysts in the Element and S-ICD, we are bullish on BSX and believe 2013 will be particularly strong for the firm.

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