Boston Scientific Earnings Top, Revs Miss - Analyst Blog

Boston Scientific BSX reported adjusted earnings per share (after considering certain one-time adjustments other than amortization expense) of 13 cents in the first quarter of 2014, 3 cents ahead of the year-ago adjusted EPS figure.

However, considering amortized expense adjustments, the quarter's adjusted EPS came in at 20 cents, 25% ahead of the year-ago adjusted number. This also exceeded the company's adjusted EPS guidance range of 16–18 cents and the Zacks Consensus Estimate of 18 cents.

Without these adjustments, the company reported net income of $133 million or 10 cents per share in the quarter, a huge increase from the year-ago net loss of $354 million or loss of 26 cents a share, respectively.

Revenues in the first quarter registered a 1% increase year over year (up 4% at constant exchange rate or CER, excluding divested business) to $1.774 billion. The figure missed the Zacks Consensus Estimate of $1.793 billion by a sliver, but remained within the company-provided guidance range of $1.755–$1.805 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 $497 million (up 1% year over year at CER) and $203 million (up 5% at CER), respectively, during the quarter.

Global sales of coronary stent system (within Interventional Cardiology) were $289 million, down 6.8%. The downfall was owing to a disappointing performance from drug-eluting stents DES that declined 5.5% to $276 million, and bare-metal stents that plunged 27.8% to $13 million.

The next biggest contributor to Boston Scientific's top line was Rhythm Management, which includes Cardiac Rhythm Management CRM and Electrophysiology. CRM reflected a sales decline of 2% to $466 million at CER.

Worldwide sales from pacemakers (within CRM) edged down 1% to $127 million, while defibrillators declined 3.1% to $339 million. Electrophysiology sales, on the other hand, improved 68% year over year to $58 million.

Over the recent past, the company has been targeting new product launches to revive the sales of the beleaguered Interventional Cardiology and CRM segments. However, the dismal performance of Interventional Cardiology and CRM during the reported quarter proved beyond doubt that the measures have not been enough to counter the ongoing challenges.

Other segments like Endoscopy, Urology/Women's Health and Neuromodulation (coming under the MedSurg broader group) recorded sales of $314 million (up 5% at CER), $125 million (up 8%) and $109 million (up 23%), respectively.

Margins

Gross margin grew 255 basis points (bps) year over year to 69.7%. Adjusted operating margin expanded 173 bps to 19.2% in the quarter. During the reported quarter, selling, general and administrative expenses increased 5.5% to $666 million, research and development expenses dropped 6.4% to $191 million and royalty expense was down by 2.4% to $40 million.

Balance Sheet

Boston Scientific exited the first quarter with cash and cash equivalents of $191 million, up from $217 million at the end of fiscal 2013, and had long-term debt of $4.24 billion. The company generated operating cash flow of $198 million and repurchased 10 million shares for $125 million in the quarter under the existing share repurchase program.

Guidance

Boston Scientific increased its 2014 adjusted EPS guidance in the range of 77–82 cents from earlier 75–80 cents (considering all one-time items including amortized expense). Revenues are expected to remain in the range of $7.30–$7.50 billion. The current Zacks Consensus Estimate for EPS of 78 cents and revenues of $7.41 billion coincide with the company's outlook.

For the second quarter of 2014, adjusted earnings are expected to remain in the band of 18–20 cents per share while the company predicts revenues within $1.84–$1.89 billion. The Zacks Consensus Estimate for EPS stands at 20 cents, while that for revenues is $1.87 billion.

Our Take

Amid challenging economic conditions, competitive environment, pressure on core segments and currency headwind, Boston Scientific posted a mixed first quarter with earnings beat and revenue miss.

For quite a long time, the US defibrillator and stent markets have remained as major overhangs. Despite several initiatives undertaken by the company to revive its top line, we remain cautious as its core segments – implantable cardioverter defibrillator and DES are still taking a toll on the numbers.

Nonetheless, we are also looking forward to the emerging market performance of the company.During the quarter, the company achieved 8% international growth on the back of 22% growth in emerging markets, which represented 9% of total company sales.

Moreover, Boston Scientific has managed to successfully move on with its strong pipeline of products. It is also focusing on strategic initiatives to drive growth and profitability. These include restructuring initiatives for 2014, targeting suitable acquisitions in areas of unmet medical needs and focus on emerging markets.

Currently, Boston Scientific retains a Zacks Rank #3 (Hold). Some of the better-placed Medical stocks are Cardinal Health, Inc. CAH, Hologic Inc. HOLX and The Cooper Companies Inc. COO, all carrying a Zacks Rank #2 (Buy).